UK - Low to middle income earners will be better off buying standard annuities, rather than taking up ‘riskier' flexible products, according to a prominent industry expert.
Ros Altmann, a governor of independent think-tank, the Pensions Policy Institute, claims that those on low to middle incomes should avoid flexible annuity products due to associated higher levels of risk.
“If you have more flexibility in the product, you will have to pay for it,” she said.
Additionally, Altmann believes that it should fall to pension providers to ensure that customers receive advice - preferably from an independent financial advisor - when buying an annuity. She claims that this would boost retirement income, since most customers do not buy the most suitable annuity for their situation.
According to Altmann, if the government raised the basic state pension by £5 a week the impact would be considerable, winning it plaudits all round.
However, “making sure that people get the right annuity rate would achieve the same thing, or even more”, she said.
Altmann also added that in the event of a customer refusing annuity advice, the provider should still be obliged by law to provide an annuity with one of the top three market rates.
Another of Altmann’s proposals would allow insurers to offer annuities with a capital protection feature, or moneyback guarantee. This would mean that the remainder of an individual’s pension money would be repaid to his or her estate after death - a feature that could help diffuse hostility towards annuities from wealthy retirees who resent being forced to relinquish control over their pension pot.
Altmann remains optimistic on the prospects of reform to the current annuity set-up, but did issue a note of caution:
“The will is there, but it depends on the responses to the government review.”
By Geoffrey Ho
* Professor James Poterba, the American annuity markets and retirement income expert, will give the 2002 Watson Wyatt Lecture at City University on May 16, 2002.
The MIT economics professor will talk on the theme of Understanding the Annuity Crisis and will consider the problems of annuity provision in the UK, in the context of his international experience.
The 2002 Watson Wyatt Lecture will take place in the Oliver Thompson Lecture Theatre, City University, Northampton Square, London on Thursday, 16 May at 5:30pm for a 6:00pm start.
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