The Retirement Income Reform Campaign believes current annuity law is not only too restrictive to those coming up to retirement and but also unfair to women
The Retirement Income Reform Campaign (RIRC) is examining whether it will re-introduce MP David Curry's private members bill, aimed at ending the age 75 compulsory annuity purchase requirement, when parliament sits.
The Curry bill had progressed through Parliament but was dropped over the summer break and will have to be re-introduced at the start of the new session. While this is something the campaign is considering but believes it will be unlikely to go ahead. The reform committee is instead changing its tactics and trying to push ahead with its argument that the current annuity environment is unfair to women.
The campaign is trying to gain support from women MPs and peers on equalising annuities and the group says it has already gained the support of the Liberal Democrats and the Equal Opportunities Bureau.
Annuity rates have been falling for years but due to women living statistically longer than men, the rates women get are substantially lower for the exact same pension savings pot, according to the RIRC.
Dr Oonagh McDonald, director of the RIRC, says: 'For most people their pension fund is their only significant income earning asset after they retire and they use their pension fund as soon as they stop work. For these people the rigidity of the current system means they have to cash in their pension fund at a time of great stock market weakness and then lock into an annuity market offering historically poor rates.
'The existing system means that most people cannot trade through current stock market weakness, nor can they protect themselves from poor annuity rates. For these people, who have prudently saved for their pensions for decades, they are trapped in Britain's uniquely rigid and unfair system.'
McDonald says the law should change so that pensioners buy on retirement a unisex annuity equivalent to a Minimum Retirement Income, to be set at a level to be decided annually by the Government. The retiree should then have the freedom to reinvest the balance of their pensions savings, beyond the amount used to buy the Minimum Retirement Income annuity, with all earnings or drawdown from such investments subject to income tax in the normal way. The existing 25% tax free lump sum on retirement should also be retained, the RIRC argues.
Other proposals the RIRC is lobbying Government on include allowing residual pension savings to be passed on at death.
Movements by the campaign shows retirement issues are steadily working their way up the UK's political agenda as the proportion of elderly voters grows. Poor stock market returns and the much touted £27bn savings gap, as reported last year in a report commissioned by the ABI, highlight the fragility of retirement savings.
The response of the annuity industry is to look to reform as a means of circumventing many of the problems apparently building up in the system. Bob Bullivant, corporate development director at Britannic Retirement Solutions, says: 'There are a lot of people who are either starting to think about their pensions, close to drawing them or having to buy an annuity.'
ABI figures show that in the region of 0.5 million retirements take place each year and pensioners are estimated to purchase nearly £7bn of pension annuities from 293,000 policies sold in 1999, according to Britannic. This rose to just under £8bn for new business for annuities and income drawdown in 2000, according to ABI figures. 'This trend should continue, because as the number of personal and money purchase pensions in operation increases so the number of annuities sold should increase,' Bullivant notes. 'Since 1991 the number of personal pension policies in force has grown by 36% with membership of occupational pensions increasing by 16% over the same period."
Critics of annuities claim they do not offer value for money and pensioners receive a bad deal from the annuity market. While agreeing reform is necessary in the annuity market, Bullivant is sceptical of the RIRC's proposals as he believes the group's proposed Minimum Retirement Income annuity would be a fiscal cross for the Government to bear.
Bullivant believes fundamental reform to the annuity market should not be undertaken before the open market option is given a chance to work properly. 'We believe the wish to tear down the entire annuity structure before enabling annuities to perform as effectively as they can is perverse.'
He cites a Mori survey, commissioned by Britannic Retirement Solutions in May 2000, showing that 77% of people have not heard of the open market option and were unaware they could buy their annuity from companies other than their pension provider. 'By not shopping around for the best annuity rate, at least two thirds of people unconsciously chose to have a lower income on retirement for the rest of their lives,' he says.
As around 40% of people at retirement could qualify for an enhanced annuity on the basis of health or lifestyle which could improve their income by up to 14% and even as much as 30%, Bullivant says, the annuity system is capable of working much better for retirees. The FSA rules that recently came into force requiring pensions providers to make it clear to retirees they could shop around for their annuity will only strengthen this he adds.
Bullivant also argues that drawdown is suitable only for people with large pension funds and has many drawbacks.
Its ability to produce significant returns, he points out, is dependent on a complex range of factors from equity and gilt market rates, interest rates and mortality drag.
He adds: 'This means that in the last three years, because of depreciating markets and reducing interest rates, many annuitants would have seen returns which are higher than those who have selected drawdown. I believe that it is important to focus on the short-comings of drawdown if reformers are genuinely interested in having a measured and open debate about retirement planning and change.'
RIRC believes current annuity law is unfair to women.
By 2021 more than a quarter of the population will be over 65.
Critics claim annuities do not offer value for money.
By not shopping around at least two-thirds of people unconsciously chose to have a lower income on retirement.
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