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Public concern about annuity prices
Partner Adrian Waddingham comments on reports in the press about the high price of buying insured annuities.
The problem
Human nature being what it is, people are reluctant about putting capital sums into an insured annuity which dies with them. This has always been the case. Now that interest rates seem to be staying low, and also because of ever-improving life expectancy, the cost of purchasing an insured annuity is historically high. Newspapers have been full of complaints about high annuity prices.
For example, a man of 65 could have bought a level pension of £10,400 with £100,000 in May 1997: today the same amount of money would buy a pension of only £8,200. This is a significant reduction!
The Government's Position
The Government will say that the low inflation, which goes hand in hand with low interest rates, is of particular benefit to pensioners, and that they cannot have it both ways. They might also make the point that low interest and inflation rates are associated with high asset values and the accumulated funds used to buy the annuity would generally be lower in conditions where annuity prices were more attractive. Inland Revenue too appear inflexible and are adamant that the purpose of the State's tax subsidies for pensions' savings is to ensure that people have a reliable income in retirement, and not for it to be used as a means of accumulating heritable wealth.
There have been some relaxations recently. Since 1995 Personal Pensions, and now from last month, Money Purchase Pension Schemes, may provide a member's pension by "drawdown" from the fund, and defer purchasing the annuity until 75. This is proving popular, but does not directly address the knotty problem of turning capital savings into income at some time.
The Insurer's Position
In fact there is little that insurance companies can do to alleviate public concern about annuity prices. UK Statutory Regulations, and European Life Directives, virtually oblige insurers to match their obligation to provide annuities with fixed-interest investments. If the insurance companies were to invest heavily in equities in the hope that these would provide a better long-term return, they would in the meantime create "mis-matching", which would cause serious strains on their solvency.
What could be done?
Whilst there is no magical solution which will reduce annuity prices, the Inland Revenue could help by allowing those forced to buy insured annuities to include in the contract better benefits in the event of early death. Such relaxations would not cost the Exchequer anything: indeed could increase the tax take if suitable rates of capital tax were charged on lump sum death benefits under approved schemes (such as the 35% capital tax that now applies on a Personal Pension fund distributed on death before the age of 75).
The changes the Revenue could permit include allowing the insured annuity to be guaranteed for a significantly longer period than the present five or ten years. Alternatively, they could allow part of the retirement fund to be used to provide whole life assurance to better protect the family - not necessarily the spouse - of those not lucky enough to have their fair share of life expectancy.
Finally, those Money Purchase Schemes that already provide drawdown, and also Personal Pensions, are required by Inland Revenue to purchase an insured annuity no later than age 75. This age seems less relevant that it did previously, and following public concern, some members of Parliament have raised it with the Treasury. Inland Revenue have now been asked to review the current arrangements including the maximum age of 75 and it is hoped that there will be some new flexibilities announced in coming months.
(Adrian Waddingham has been chairing an ACA sub-committee on the current difficulties of the annuity market, and in particular members of Money Purchase Pension Schemes.)
Postscript - December 1999
Adrian was asked to address the Parliamentary pensions Group of MPs in the House of Commons on the 7th December. It is clear that many MPs are aware of these annuity concerns - and not least in relation to the coming introduction of "Stakeholder Pensions" in 2001. It will not be easy to persuade those not currently pensioned to start new savings if they fear their retirement annuity will represent poor value for money.
Also in December the Inland Revenue have made some comments suggesting that the "age 75 rule" for the compulsory purchase of pensions does not need relaxing. It is to be hoped that this is not the final word but rather another way for them to gauge the level of public concern on the issue.
For further information, please contact Adrian Waddingham at the Amersham office.
Adrian Waddingham, January 2000.