Written by Malcolm Small on Thursday 20 February 2014
The Financial Conduct Authority (FCA) is currently investigating the retirement income markets. This is probably overdue. It’s been clear for some time that consumers too often go with inertia, buying the annuity they are offered by their pension provider, without “shopping around”. Despite moves to make such shopping around the default option, and suggestions that all annuitants should receive advice before buying, the wrong choices continue to be made in too many cases, locking people into a lower income than they could have got, with a “once and done” decision which is irreversible under current rules. Retirees struggle to understand the myriad options and choices available to them, in many cases, despite recent improvements, poorly supported by inadequate information from some providers. I expect the FCA review to result in some serious enforcement action for failure to treat customers fairly. The retirement income rules, from a policy point of view, are in the hands of HM Treasury. Their position has always been that the “quid pro quo” for receiving tax relief on contributions is a requirement to secure an income for life (usually an annuity), so that the pensioner does not “fall back on the state”.
This argument will hold increasingly little water as we move to a single, flat rate, basic state pension, as a right based on NI contributions, rather than means tested retirement income benefits such as Pension Credit. There may be a little Council Tax Benefit or Housing Benefit, but this will be at the edges, so why do we still insist on the current retirement income rules? The Pensions Minister shows signs of “getting” this but, as indicated above, the rules are not in his gift. We are the only country in the world that feels the right to tell people what to do with what is THEIR money at retirement; the UK has a very large proportion of the global annuity market. We are an anomaly.
In Australia, retirees can access pretty much their whole pension fund at retirement, if that is what they want to do. Only a tiny proportion do so. The rest know that the fund has to last and invest for income accordingly. There are very few rules around retirement income, unlike here, and the irony is that the state “Age pension” in Australia IS means tested. Isn’t it time we stopped patronising our retirees around what is their money, and started trusting them to do sensible things? And if they do run out of funds, the worst that can happen is that they fall back on a “decent” basic state pension, that they have earned as a right.