Coping with the crunch:
pension annuities
Jane Vass
ILC-UK 13 October 2009
Age Concern England and Help the Aged have joined together to form
Age UK, a single charity dedicated to improving the lives of older people
Challenges facing the pension annuity market
§
Market turbulence
§
Lack of attention given to modest savers
§
Getting best value
§
Making annuitisation a better fit for the mass market – over 450,000
annuities sold in 2008
§
Impact of auto-enrolment:
– Increasing demand
– More small funds
– Multiple funds
Age Concern England and Help the Aged have joined together to form
Age UK, a single charity dedicated to improving the lives of older people
‘Lost’ accounts – the Australian experience
Source: Australia’s lost superannuation accounts, Associate Professor Hazel Bateman,
Centre for Pensions and Superannuation, The University of New South Wales, 2008
Age Concern England and Help the Aged have joined together to form
Age UK, a single charity dedicated to improving the lives of older people
Small funds: the challenges
§
Annuitisation not feasible for small amounts
§
Welcome ABI work to facilitate consolidation of funds
But need to improve trivial commutation (cash payouts of small funds)
§
Trivial commutation limit tied to maximum lifetime saving (frozen from 2011)
§
’12 month’ rule – ‘lost’ accounts may miss the boat (rebate-only plans?)
§
Administratively complex taxation:
– Tax is deducted – often higher rate - and may have to be reclaimed
– TaxHelp for Older People -1,200 trivial commutation clients since June
2009
Age Concern England and Help the Aged have joined together to form
Age UK, a single charity dedicated to improving the lives of older people
‘Stranded pots’
Trivial commutation?
– total pension too high
modest
occupational
pension over trivial
commutation limit
Annuity?
– too small
+
£618
Personal
pension
fund
Consolidate?
- not possible
De minimis payment?
- not personal pensions
£155
tax-free
cash
Pay in more so that
annuity is possible?
Unauthorised cash payment?
- possibly, taxed at 55%
Age Concern England and Help the Aged have joined together to form
Age UK, a single charity dedicated to improving the lives of older people
£209
Getting best value: the challenges
§
Welcome ABI’s work on increasing awareness of the open market
option
But market remains difficult to navigate
§
Wide price dispersion on the open market
§
Lack of transparency except for open-market providers
§
Increasing differentiation in pricing (postcode, enhanced/impaired)
§
Paradox of choice
Age Concern England and Help the Aged have joined together to form
Age UK, a single charity dedicated to improving the lives of older people
Open market pension annuity rates
M65, £100,000, le v e l annuity with 5-ye ar g uarante e
£8,000
£7,500
£7,000
£6,500
£6,000
£5,500
£5,000
01/2004
01/2005
01/2006
01/2007
Top c ompany
01/2008
B ottom c ompany
Source: Annuity Direct, FSA comparative tables
Age Concern England and Help the Aged have joined together to form
Age UK, a single charity dedicated to improving the lives of older people
01/2009
Annuities – how do they measure up?
Desirable features
Guaranteed lifetime income
Cons
P
Irrevocable
Interest rate risk at outset
Simple but with options for choice
P
Options only at outset
Cover for dependants
P
At outset only
Index-linking/escalation
P
Few providers - poorer money’s worth
Cover for one-off expenses
X
Illiquid – but 25% tax-free cash
Bequests
X
Unless guarantees available
Age Concern England and Help the Aged have joined together to form
Age UK, a single charity dedicated to improving the lives of older people
Improving annuitisation: opportunities?
§
Facilitating staged retirement
§
Reform trivial commutation
§
Building on ‘Options’
§
Automated brokerage with clear pathway in?
§
Increase ability to offer longer-term value protection?
§
Smoothing short-term rates?
§
Review annuity funding?
§
Rebranding?
Age Concern England and Help the Aged have joined together to form
Age UK, a single charity dedicated to improving the lives of older people