Annuities for Pensioners

Jim Shannon Excerpts

Tuesday 7th January 2014 Westminster Hall

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

It is a great pleasure to serve under your chairmanship, Mr Dobbin. I congratulate my hon. Friend the Member for Gloucester (Richard Graham) on securing this debate and opening it so well. He brings to the matter his professional experience before entering the House, his experience as chairman of the all-party parliamentary group on pensions and his experience of discussing these matters in Gloucester pubs, all of which have helped our deliberations. I thank my hon. Friend the Member for Fareham (Mr Hoban), who served with such distinction as a Treasury Minister dealing with such matters for more than two years and made a substantial contribution to the Government’s achievements in the area. I also thank my hon. Friend the Member for Warrington South (David Mowat), who spoke with great passion and demonstrated his determination to ensure that consumers—our constituents—are served well by the annuities market.

It is a priority for all of us that the annuities market should work in consumers’ best interests. When people have saved hard for a pension, it is right that they should get the best out of their savings on retirement. The decision that people make about their savings on retirement can determine what income they receive for the rest of their lives. Undoubtedly, it is one of the most important financial decisions that a person can make. As we have heard, more than 400,000 people purchase annuities each year, and studies show that there can be more than a 30% difference in the incomes offered by providers, highlighting the importance of making the right decision.

The Government want to ensure that the annuities market works in favour of the consumer and that consumers can make well-informed decisions to secure the best rates and exert effective competitive pressure on the market. The Government have been working with industry and consumer groups to make effective changes in the market, including work carried out by the open market option review group, which has introduced a number of measures aimed at encouraging consumers to shop around on the open market when buying an annuity.

For example, as my hon. Friend the Member for Gloucester pointed out—as did my hon. Friend the Member for Fareham, who worked so hard on the matter—the Association of British Insurers has introduced a code of conduct for retirement choices, which came into effect on 1 March last year. The code is binding on all ABI members that sell annuities, covering almost all the market. In addition, tailored advice and tools have been developed by the Money Advice Service and the Pensions Advisory Service to help consumers understand their choices and promote the benefits of shopping around.

The ABI code has brought about an important change in how annuity providers communicate with their customers, a point raised by my hon. Friend the Member for Fareham and my hon. Friend the Member for South Derbyshire (Heather Wheeler). The removal of application forms from pre-retirement packs actively encourages consumers to engage with the important process of choosing their annuity type and provider, ensuring that they do not automatically settle for the default. Through requirements on providers to provide better information to retirees in their wake-up packs, and new and improved tools such as the Money Advice Service’s comparison tables and the Pensions Advisory Service’s online planners, we can ensure that consumers have the resources that they need to make informed decisions.

The ABI will evaluate the impact of its code in March this year, one year after its implementation. The OMO review group will also evaluate its wider package of measures and their effectiveness.

[Jim Shannon (Strangford) (DUP)]

I apologise for not being here in time, Mr Dobbin. My plane was an hour late, so I could not be here. I also apologise to the Minister and to the hon. Member for Gloucester (Richard Graham). I wanted to speak in this debate, but I did not have the chance. Does the Minister agree that the language used in the selling of annuities, especially to elderly people, must be such that they can understand what they are getting themselves into? I believe that they do not.

[Mr Gauke]

The hon. Gentleman raises an important point. It must be right that we should do all that we can to ensure as much transparency for consumers as possible. That includes a number of aspects, some of which I have mentioned. Let me go further.

The code and other measures will only be as successful as the outcomes that they prompt. We want clear evidence that more people are making active, better choices about their retirement income as a result of the changes. If we do not, we will not hesitate to consider further action. In addition to the ongoing work to help consumers make better choices, the FCA is currently conducting a thematic review of the annuities market and how well it is working to serve consumers’ interests, a pricing survey of all annuity providers and a comparison of the rates available to consumers through a range of distribution channels. The review will consider whether firms create barriers that can restrict consumers from shopping around, and what risks and potential for detriment those barriers may present for consumers. I look forward to the report’s initial findings, which will be published next month.

Although it is imperative that the annuity market works in the consumer’s interests as an effective option for retirement income, it is important to consider the retirement income market as a whole to ensure that consumers have income flexibility in retirement. To increase flexibility, the Government have removed both the default retirement age and the effective requirement to purchase an annuity by age 75. Whether they annuitise or not, individuals are permitted to take 25% of their accumulated pension savings as a tax-free lump sum before going on to secure an income with the remaining savings. To ensure that that income can best serve retirees’ needs, the Government have reformed the capped draw-down rules and raised the annual withdrawal limit from 100% to 120% of the value of an equivalent annuity. That can help to raise the retirement incomes of individuals in draw-down arrangements who may recently have experienced reductions in income due to wider economic conditions.

There is additional flexibility for those with a guaranteed income of at least £20,000 a year. With income already secured, they have the option of a flexible draw-down arrangement, in which they can withdraw any amount from their pension pot. Those coming to retirement will benefit from having more flexibility in deciding how to provide an income for themselves in retirement, and for those with small pension pots, the Government have taken steps to reform the trivial commutation pensions tax rules. An individual who is aged 60 or over with total pension savings of less than £18,000 can withdraw the entirety of their savings as a lump sum. The first 25% of that lump sum is normally tax-free, with the remainder taxable as income. In addition, small occupational pension pots under £2,000, and up to two small personal pension pots under £2,000, can be taken as a lump sum for those aged 60 or over, even when people have savings in excess of the aggregate limit. All those options add flexibility.

Having a decent retirement income is driven by two factors: saving enough for retirement through working life, and making good choices at retirement to secure a reliable and maintainable income throughout retirement. It is important to remember that the biggest determinant of how much income someone receives in retirement is how much they have saved during their working life. With the introduction of auto-enrolment, the Government have taken a huge step forward towards ensuring that consumers start to save for their retirement and carry on saving throughout their working life. Auto-enrolment is the most important pensions change for a century—around 6 million to 9 million people will make new savings and increase savings for their retirement. It is estimated that that will generate around £11 billion in extra pension saving by 2020, which will mean an extra £11 billion coming to the retirement income market within the next six years and a new wave of retirees with robust defined contribution pension pots, making it all the more important that we ensure that the retirement income market is working effectively.

The Government are also acting to protect those valuable savings. We recently consulted on proposals to cap pension charges and introduce a range of transparency measures as a means of ensuring that savings are not eroded by charges. We are currently assessing the responses to the consultation and an announcement will be made when that work is completed.