This piece first appeared in Saga Magazine in March 2002
The text here may not be identical to the published text

Annuity Reform Rejected

The Government has rejected any fundamental reform of annuities. The legal requirement to buy an annuity with almost the whole of our pension fund no later than the age of 75 has come under sustained attack over the last few years. Annuities have been criticised for being inflexible and offering poor value for money. But in a consultation paper published in February by Treasury Secretary Ruth Kelly and Social Security Secretary Alistair Darling, the Government concluded "annuities provide a financially efficient and secure means for turning pension capital into pension income" and firmly said ‘no’ to calls for reform.

· The requirement to buy an annuity at 75 will remain – "people should find it good value to [buy an annuity] at age 75 and often well before that…There are no plans to alter the age at which buying an annuity becomes essential."

· People will not be given the freedom to invest more of their pension fund as they please. "It would mean allowing people to break the terms on which their retirement savings have been built up with tax privileges…it is hard to see why better off people should be able to…extract capital from their personal pension funds…the costs to other taxpayers could be large."

Instead, the Government plans three things.

Choice People often make bad, or at least ill-informed, choices about which annuity to buy. As Saga Magazine has shown that can cost people dear. It wants to make insurance companies tell us clearly about the choices and educate us so we understand them better.

Competition "is less lively than in other markets". The Government wants to encourage innovation among annuity providers and promises to approve new sorts of annuity product more quickly.

Flexibility Once you have bought an annuity you are stuck with it for life. The Government suggests three reforms.

· ‘Fixed-term annuities’ would let us use part of our fund to buy an annuity for, say, five years and then review what we need. But at 75 we would still have to use what was left of our fund to buy one for life.

· We can change our mortgage lender or our current account, why not our annuity provider? The Government warns this attractive improvement may not be possible.

· Annuity payments themselves may be able to alter in amount year by year to recognise changing needs.

Modernising Annuities is available by calling 020 7438 7514 or from the Inland Revenue website www.inlandrevenue.gov.uk. Comments are invited by 5 April.

March 2002


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