November 2007

"Third way" decision - a disappointment

Dear Editor,

The Pre-Budget Report contained the disappointing news that the Government has decided not to encourage the further development of 'hybrid' annuity products by rethinking its tax rules.

The Chancellor's justification was that he was unwilling to add complexity to the tax system to "potentially benefit only a small number of consumers with large pension savings". My view is that the wealthy are already well served by the existing income drawdown market. It is those with more modest pension funds who currently have little option other than to buy a lifetime annuity that are in desperate need of more innovation and product choice.

'Hybrid', 'third way' or 'middle market' retirement income products - which combine some of the security of lifetime annuities with some of the flexibility of income drawdown - are aimed at the rapidly growing number who want to remove investment performance risk while still maintaining some control over their pension funds.

Consumers are starting to question the logic of buying a lifetime annuity too early in retirement because it removes any ability for them to adapt to changing personal or economic circumstances until death which could be two or three decades ahead. Most people aged 60 or 65 only qualify for healthy life annuity rates while those who defer for a few years are more likely to qualify for higher enhanced or impaired life rates. The added value from the mortality cross subsidy is also low in early retirement but becomes more worthwhile from age 75 onwards.

The retirement income market is currently worth about £12 billion a year and the ABI forecasts it to grow to over £18 billion by 2012 due to a rapid rise in the number of people reaching retirement age with money purchase pension arrangements. However, it remains polarised between the risk and cost of income drawdown and the inflexibility of lifetime annuities. Only recently has the void between the two extremes been filled by new 'third way' propositions that are firmly aimed at the mainstream market, not just a wealthy elite.

The pressure for change is building. In the spirit of Treating Customers Fairly, we believe the Government should be allowing consumers greater choice - and awareness of those choices - at the point of retirement.

Kim Lerche-Thomsen
Founder and Chief Executive
Living Time