"Before we kill the annuity market let's consider that it's not the annuity that is wrong," says Premier's John Reeve as he rebuffs the negative press coverage of annuities.

With all the press coverage of the annuity market, most recently from the Sunday Times under the unworthy title of "Stop the Pensions Scandal", one would be forgiven for thinking that annuities are themselves 'the devil incarnate'.

Let me say it at the start and let me be clear and unequivocal: "Annuities are good, annuities work and I hope that annuities will be with us for many years."

I will go further; for many people annuities have kept them from poverty!

So why are annuities good?

- They stop you outliving your assets. People generally underestimate how long they will live and we are all living longer. Without annuities a whole generation would now be living in poverty.

- They are flexible and can be structured to meet your needs. I plan to structure my annuity purchase to provide me with income when I need it (while I am younger) and security for my wife.

- They are secure. Despite the problems of the financial sector most people agree that there is relatively little chance of the providers defaulting and not being rescued by the industry.

- Annuities 'do exactly what they say on the tin'. There can be no mistake, you know exactly what you will get and when.

So what are the issues with annuities?

First there is clearly an issue of pricing. We are told constantly that annuities are too expensive. The cost has undoubtedly been affected by quantitative easing but those who say that they are too expensive are making assumptions about the future longevity of the buyer and future investment returns that may or may not be true. They are also making a judgment about the cost and value of security. The cost of annuities is affected by the level of capital needed to back the contract but without that capital the possibility of default by the payer increases. What value would you put on the security of your pension? Would you prefer a 15% higher pension but with a 5% risk that it may not be paid in 10 years time?

The second issue is with the annuity market. The annuity market should be as close to a perfect market as you can get. In the absence of any security issue, with an underpinning insurance arrangement (albeit untested) and with plenty of information about the price, economic theory would suggest that prices should be driven by the unstoppable forces of supply and demand. However the diversity of prices available and the noise in the press suggests that the market isn't working. So what is going wrong?

If one looks at the league tables of annuity pricing, most of those in the bottom half of the table do not really want the business. They generally only sell through apathy to those who have saved with them. One might conclude there is a convenience premium here. Given the very low values of many pension pots available to purchase an annuity it may be that, for many, the higher income available by shopping around doesn't justify even a small amount of work in finding a provider. This doesn't make it wrong. Recently I looked to see if I could get a better deal on my car insurance. I found a provider £20 cheaper. I couldn't be bothered to change even though this represented a 10% saving! My time is too valuable.

People should be encouraged to shop around for annuities and they should understand the options. However, it is misleading to suggest that the number of people who stay where they are is an indication of a problem. For some people it may be appropriate to stay where they are.

A third issue to consider is that people will often buy a level, single life pension rather than a lower initial pension with increases and a spouse's benefit. Too often, this is quoted as if such an option is, by definition, wrong - it isn't. It may be the right option for some. Here the issue is whether people are making the right financial decisions. This isn't a problem of the annuity market, it is an issue of financial education.

So, before we kill the annuity market let's consider that it's not the annuity that is wrong. With good financial education and clear communication the annuity market is well positioned to serve UK retirees well. What we need is work to re-enforce the good things that annuities offer and to help people make the right decision (which may be to stay where they are and have a level single life pension).

Who is going to take up this challenge? The industry can help by creating education tools that help people make the right decisions through their career and at retirement and employers can help by making these available (click here for an example).

If you are an employer will you be helping your members make the right decisions through life?

If you are a provider what can you do to help underpin the good things in the annuity market?

If you are retiring soon what help do you need?

Written by John Reeve, senior consultant, Premier

John.reeve@premiercompanies.co.uk