Baroness Greengross
To ask Her Majesty’s Government how they will ensure that people get value for money when purchasing a pension annuity.
The Commercial Secretary to the Treasury (Lord Sassoon)
The Government believe that it is important to incentivise individuals to save for retirement and recognise the importance of the annuities market. We support the open market option, which enables individuals to shop around for the best rate, and continue to consider ways to make this more effective. Complementing this, we will continue to work with interested groups to improve the quality of pre-retirement advice, including seeking independent financial advice, so that consumers can make an informed choice on how best to draw benefits from their pension fund.
Baroness Greengross
I thank the Minister for that helpful reply. However, as we know, many potential annuitants do not realise that there is an open market option. Has the noble Lord considered introducing the approach that the Pension Income Choice Association, PICA, has put forward? It believes that the default option should be for everyone to have the opportunity to review their options when they retire. It would like to see the production of a personalised statement—a sort of passport—which would contain sufficient information for people to use to obtain quotations.
Lord Sassoon
My Lords, I am grateful to the noble Baroness for raising this important topic. Some 450,000 annuity policies are written every year, with around £11 billion in annual premiums. I am aware that the Pension Income Choice Association has recently met my honourable friend the Financial Secretary to discuss its proposals. We encourage consumers to shop around under the open market option and we welcome all suggestions as to how this can be made more effective.
Baroness Hayter of Kentish Town
My Lords, given the importance of this issue, particularly for those with small pots of money, can the Minister assure the House that nothing in the spending review will undermine the plans for a generic financial advice service to help those with small pots, for whom the choice of a good annuity is so important?
Lord Sassoon
My Lords, I can confirm that we want to push on with our proposals for financial education underpinning choices about retirement savings and other important financial services. The Consumer Financial Education Body has been asked by the Government to work up its plans for an annual health check. It publishes a guide on retirement savings. I certainly take the point very well.
Lord Newby
My Lords, following on from that question, does the Minister accept that the key problem with people deciding which annuity to purchase is often that they are not experts and want impartial advice at that point? That is why the Consumer Financial Education Body is so important. Will he redouble the Government’s efforts to get the Consumer Financial Education Body to develop an online tool so that people who are looking to decide which annuity they purchase can go not only to the company from which they are taking their pension pot but also to someone who is clearly impartial?
Lord Sassoon
My Lords, I agree with my noble friend that we need to look at all options to make it easier for people to access online and other sources of independent advice. The CFEB was a significant initiative of the previous Government and we are encouraging it to press forward on this issue.
Earl Cathcart
My Lords, I ask this question with a certain amount of self-interest. Is it the Government’s intention to remove the requirement to buy an annuity when a person gets to a certain age? If it was made optional for the owner of the pension pot, they could receive the annual income from that pension, albeit probably smaller than the annuity, and then the capital sum would fall into the estate on death.
Lord Sassoon
My Lords, I am happy to confirm to my noble friend that the Government have announced that compulsory annuitisation at age 75 will end. As an interim measure, we have raised the limit from 75 to 77 years to make sure that people are not trapped in compulsory annuitisation while we consult—as we have been doing—on a new system that gives people greater choice as to how they save for their retirement.
Baroness Browning
Will my noble friend look at the length of time it takes for people who exercise an open-market option to receive their money? Very often, they are quoted two to three months. Of course, there have to be exchanges of paperwork and documentation has to be verified, but there can be significant changes in the fund during that time of process.
Lord Sassoon
My Lords, my understanding is that, thanks to work being done by the Association of British Insurers and others and the introduction of a new electronic transfer system, the actual time taken to make the transfer has come down from 35 days to 11 days. However, if there are other ways of making the transfer process easier, we will of course look at them.
Lord Davies of Oldham
My Lords, is not the real problem for the foreseeable future that, with interest rates low, the returns on annuities will be well below people’s expectations? Could not the Government think more radically about this in the longer term? Could we not think of following the pattern adopted by some other European Governments on annuities, whereby people would be able to purchase government bonds at a slightly better rate of interest than obtains at present and at the same time contribute to the Government in the shorter term sums which would help the Exchequer?
Lord Sassoon
My Lords, low interest rates are vital to the growth of the economy. In that context, it is important that people are able to choose between a wide variety of savings products. As well as making more flexible people’s choices about their retirement savings, the Government offer not only the opportunity to invest in gilt-edged securities but a range of products through NS&I.