July 2008

Time for a rethink

Dear Editor,

For how much longer can the Government keep its head in the sand and retain the rules compelling pension investors to purchase an annuity no later than age 75? In light of the continuing improvements in pensioners' mortality it is quite extraordinary that they continue to passionately defend their stance in the face of all the compelling demographics that suggest that the time for reform is long overdue.

I first encountered this issue some 15 years ago when - while working for another employer - we tried to launch a flexible annuity that would have allowed investment flexibility within the pensions wrapper beyond age 75. The Treasury rejected the product as an annuity - and a similar 'managed annuity' from none other than Equitable Life - on the grounds that it did not meet its previously unpublished criteria for an annuity - that it should be "safe, stable, regular and for life". However, the Conservative Government of the day came under so much pressure as a result of this ruling that they were forced to find an alternative - which led to the birth of income drawdown in 1995.

I am unaware of any subsequent Treasury definition of what constitutes an annuity. Instead we are now getting a proliferation of 'third way' products - some of which appear to qualify as variable annuities - and others which are more correctly defined as structured drawdown products. We shouldn't also forget the 'open annuity' nor the alternative 'scheme pension'- originally designed with occupational schemes in mind but now being adapted - some would argue contentiously - as an option for SIPPs. The common denominator with most of these products is complex charging structures and a lack of transparency particularly around the guarantees.

While not wishing to berate the product innovators it is my contention that this plethora of product options is both confusing and unnecessary - and is largely the result of the Government's misguided attachment to annuities. When one also takes into account the industry's very poor track record on delivery of the open market option surely it is time for a radical rethink. The Government also runs the risk of further damaging the appeal of personal accounts if it persists with annuity compulsion.

As far as I am aware there has never been evidence of any tax loss to the Exchequer if annuity compulsion was removed. Also the risks of capital running out are often overstated - particularly when one considers the risks associated with poor investment performance prior to age 75 that - in an extreme situation - can lead to the loss of most of one's pension savings.

I cannot believe that this situation is sustainable - and believe that we urgently need a rethink of this crucial element of the Government's pensions policy.

John Moret
Director of Sales and Marketing
Suffolk Life