Poor annuity deals offered by pension firms are to be punished by the government with a plan to unlock the lifetime contract.
Pensions minister Steve Webb has long criticised pension firms for offering bad returns on investments by the retired and is about to crack down on the industry for taking advantage of millions by paying a pittance in return for their lifetime savings.
An annuity is a lifetime contract between an investor and pension company. The pension company offers a guaranteed return for life on the investment.
However, falling interest rates and returns on government gilts – the investments that underpin annuities – has meant many recent retirees have seen poor returns on their savings.
The Department of Work and Pensions has spent months trying to persuade pension firms to change the terms of annuities without success, so is now threatening to change the law to force them, to offer better deals.
Shop around for best annuity deal
“When you take out a mortgage, in a few years if rates change you can switch your mortgage,” the minister said in The Sunday Telegraph
“When you take out an annuity, that’s it – for life. This could easily be for a quarter of a century. Why shouldn’t you be able to change your annuity provider so a few years later somebody else could offer you a bigger pension? Why shouldn’t you be able to shop around?”
Webb also accuses advisers and pension firms of skimming profits from the retired without offering good explanation why.
“There are odd percentages going in funny places for no good reason,” he said. “We need to ensure it’s transparent. This is a complicated transaction for many people. The industry understands this stuff, the public don’t.
Pensions lottery
“I think lottery is a fair word. We are worrying about charges, but if the outcome at retirement can differ by 15% to 20% or more just because of who you go to, that’s a huge difference and so there can be an element of a lottery in that.”
Although the law was changed recently to allow pensioners not to buy an annuity with their retirement savings, around 400,000 people a year entrust their money to financial firms.
Last year, pressure from the minister led to pension firms warning their clients to shop around for annuities to find a better deal – but that only came at the eleventh hour when he threatened to legislate to make the system fairer.
