"People like choice and people like people who give them choice," says Spence & Partners' Alan Collins as he discusses annuities.
Yesterday, L&G announced that individual annuity sales have fallen by 40% following the recent budget. This follows on from Standard Life reporting a drop of 50%. To me, the only surprise from this is that sales have not fallen further.
The brave new world of choice for pensioners is here. And even better news for George Osborne and Steve Webb is that it seems to be a happier world. People like choice and people like people who give them choice. Happy days…
But choice for all? Well, no.
The detail of L&G's statement notes that the bulk annuity market remains healthy. Why? Simply because the bulk annuity market is 'not affected' by the reforms. Members of defined benefit (DB) schemes (and the trustees and employers who look after them) are faced with a more restricted future. With a possible ban on transfers out of DB schemes looming and no mention of allowing DB schemes the freedom afforded to individuals, the only choice for the vast majority of DB schemes will be the bulk annuity market. And the only choice for members will be the type of benefits offered by the scheme, even if that does not suit their individual circumstances.
So, what can we do about this?
First of all, transfers from DB schemes must be allowed to continue. Before retirement, members currently have the right to transfer the value of their benefits to a pension vehicle of their choice. To take that away would be a disgrace.
Secondly, funded DB schemes should be given a mechanism to allow current pensioners to receive their income in a much more flexible way. DB schemes are holding "pots" of money to pay the pensions, so the pensioners should be allowed access to those pots in the same way that individuals can going forward. A pension of £10,000 a year might be worth £200,000. So, why not let the pensioner take £30,000 this year and £20,000 the next? Why should members of DB schemes not be "trusted" in the same way as everyone else? I say they should. Trust the members; trust the trustees – that would give real choice for all.
Written by Alan Collins, head of corporate advisory services, Spence & Partners
Alan_Collins@spenceandpartners.co.uk
