Commercial secretary Lord Sassoon has been told to take steps to improve consumer access to the open market option (OMO) and intervene on poor annuity rates.
During a House of Lords debate yesterday, Lord Davies of Oldham raised the issue of low annuity rates disincentivising people to save for retirement.
"With interest rates low, the returns on annuities will be well below people's expectations. Could the government not think more radically about this in the longer term?
"Could we not follow the pattern adopted by some European governments on annuities, whereby people would be able to purchase government bonds at a slightly better rate of interest than obtained at present?"
He also said annuitants contributing to the government in the shorter term sums would help the Exchequer.
But Lord Sasson said interest rates are vital to growth and could not be sacrificed for the sake of retirement saving products: "It is important people are able to choose between a wide variety of savings products.
"As well as making more flexible people's choices about their retirement savings, the government offer not only the opportunity to invest in gilt-edged securities but a range of products through NS&I."
Lord Sassoon pledged to place IFAs in a central role in the improvement of consumer knowledge of the OMO.
Lord Sassoon said: "We support the open market option, which enables individuals to shop around for the best rate, and continue to consider ways to make this more effective.
"Complementing this, we will continue to work with interested groups to improve the quality of pre-retirement advice, including seeking independent financial advice, so that consumers can make an informed choice on how best to draw benefits from their pension fund."
Baroness Hayter of Kentish Town asked for confirmation that "nothing in the spending review will undermine plans for a generic financial advice service" for small pension pot holders.
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