Pensions minister Steve Webb has proposed radical changes to the current annuity system, which would give retirees the chance to switch annuities every few years rather than being locked in for the whole of their retirement.
These "switchable" annuities would be an alternative to the current system which leaves many pensioners with a meagre retirement income. As it stands most people use their pension savings to purchase an annuity, but if they choose poorly they could end up being locked into a poor-value product until they die – currently it's a one-time-only purchase, a system which Mr Webb has called a lottery, and unless people carefully shop around they could lose out in thousands of pounds over the course of their retirement.
This is something that the minister wants to change. Under the new proposals pensioners will instead be able to regularly compare the options and switch to better paying annuities, much like the current mortgage system which allows homeowners to switch to better deals every few years.
The blueprint hasn't yet become policy but, if approved, it would be the biggest overhaul to the private pensions system in years. Additional proposals include plans to introduce curbs on the hidden fees that many insurance firms charge as well as making those charges more transparent, and making sure those with specific health or lifestyle conditions have the help they need to find the best deals.
However, there are concerns that the changes could have the opposite effect in terms of retirement income with annuity rates potentially being even lower, something which won't be appealing to those who have already had to contend with plunging rates over the last few years.
"It is encouraging that the Government appears to be examining every facet of annuities in an attempt to improve outcomes for individuals at retirement, but the proposal for switchable annuities seems to be a step too far.
"The likelihood is that this proposal would result in even lower annuity rates, whilst the market is already served to some extent by the existence of fixed term annuities. A better use of Government resources would be to improve the take up of the open market option amongst consumers and ensuring that all individuals shop around for the best and most suitable annuity."
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