Plan to switch annuities is just political point-scoring

Liberal Democrats annual party conference 2010

For those of you who have read my blogs about pensions before you'll know I'm a fan of pensions minister Steve Webb. Aside from being the longest serving minister since the post was introduced in 1998, he has eminently sensible ideas and actually knows what he's talking about.

However, I have to disagree with his latest idea: switching annuities. Until now, Webb has refused to lower himself to political point-scoring, and instead reformed pensions in a pragmatic way in order to future-proof them. But the idea that retirees could switch pensions like they do mortgages is pie in the sky, to say the least.

Webb has done a great deal to ensure that annuities are becoming more transparent, including prompting insurers to establish a new code of conduct and promotion of the Open Market Option (the ability to shop around for an annuity).

Getting the most out of your pension when buying an annuity is of vital importance and more people should be taking advice on the one shot they have to maximise their retirement income. Switching pensions as you would a mortgage may sounds like a brilliant idea (after all the main criticism of annuities is that once you're signed up you can't get a refund) but the ability to switch would mean annuities would cost a fortune and retirees would likely receive a worse deal than they do now.

Think about it, the insurer bases the income it provides on how long you have to live, and if it has to base income on when it thinks you will up and leave that income is going to reduce.

The fact is retirees can already switch annuities, by buying a fixed term annuity which pays out for a set period and uses a percentage of your pension. When that period is over you pension pot, minus the income you already received, is given back to you. You can decide to buy another fixed term annuity, but a conventional annuity or go into drawdown.

There are options out there for retirees but most don't know about them because they don't receive advice.

What Webb should be promoting, and even incentivising people to do, us taking independent financial advice.

We already have a hugely complex pension and annuity system, instead of making it more complex people should be encourage to hire a professional to navigate these choppy waters.
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