Pensions minister Steve Webb plans to allow pensioners to break annuity contract and switch to another provider
Government proposals to allow retired workers trapped in poor-paying pensions to switch to a better deal have provoked a furious backlash from the pensions industry, which claims they could leave the elderly worse off.
Steve Webb, the pensions minister, wants pensioners to be able to switch annuities in the same way homeowners can change their mortgage deals every few years. The government plans would end the current "lottery" faced by workers who build up savings over their lifetime only to swap them for a low-paying regular income, called an annuity. In recent years annuity rates have plunged, with savings of £100,000 translating into an income of just £5,000-£6,000 a year for life, compared with £15,000 two decades ago.
If pensioners are allowed to break out of their annuity contract and switch to another provider, it would enable them to access potentially better rates, especially if their health sharply deteriorates. The Department for Work and Pensions said the proposals were part of a package of measures ensuring that retiring workers obtain a better deal and more choice in a market where few shop around.
But Phil Loney, chief executive of Royal London, the largest mutual pensions company in Britain, said: "The pensions minister has clearly not thought this one through. Currently, when purchasing an annuity savers are buying a guaranteed income for life. If people are able to switch annuities mid-term, the guaranteed income becomes very difficult to price correctly. The impact of switchable annuities would be to drive down the guaranteed income that savers are able to secure with an annuity. This presumably is not the outcome that the pensions minister is looking for."
Tom McPhail, a pensions expert at financial advisers Hargreaves Lansdown, said: "In today's market, a 60-year-old buying a lifetime annuity with £100,000 would get £5,474 a year. By comparison, if they bought the same level of income on a five-year fixed-term basis then unless annuity rates improved, at the end of the five-year term their income would fall to £4,981. This highlights the fact that switchable annuities are unlikely to offer such attractive terms in the first place."