| Previous Section | Index | Home Page |
Mrs. Browning: The latest figures produced by the Government show that children born last year will have a life expectancy of 74.91 years for men and 79.86 for women. There is still a five-year difference.
Ms Stuart: That is one way to look at the ultimate figures, but if we consider what is happening by 10-year age groups, the figures are different. Longevity is determined by such factors as infant nutrition, so the post-war generation, born between 1945 and 1955, will probably have a profile different from that of later generations. We need to segment the figures more carefully.
The principle of insurance is pooling risks. Separating out various groups is the start of a dangerous tendency. I declare a generic gender interest, and I am delighted that clause 1(4)(c) provides that annuities purchased to provide the proposed minimum retirement income should be provided on a unisex basis. We should not undermine the principle of pooled risk by separating provision for the genders. [Interruption.] The Conservative Front-Bench spokesman appears to doubt that. We are equalising
pension age and I declare a further interest because I am in the first group of women—born in 1955—whose retirement age will be the same as men's.
Mr. Dismore: Is there not a difference between the pooling of risk between the genders by the state, which carries it across the whole economy, and the pooling of risk between individuals who happen to be men or women? It is clear that it is part of the state's responsibility to consider the issue, but does my hon. Friend agree that, as matters stand, we could run the risk of robbing Peter to pay Jane?
Ms Stuart: We may, but, on balance, it is a risk that I am prepared to run. I support the concept of annuities, but they have their drawbacks, one of which is that the Government force everyone with a defined contribution pension to buy one. We do not have a choice. It is also the only financial decision that is irreversible. Once an annuity has been bought, one cannot make any changes.
The decision is not a simple one. There are many different types of annuity: capital protected, single-life, joint-life, level, impaired-life, escalating, investment- linked. I will not go on and I certainly will not try to explain the various types. Despite the huge variety available, the choices that people make are limited. In his explanatory document, the right hon. Member for Skipton and Ripon says:
- "We have also rejected trying to create 'fancy annuities'".
Mrs. Browning: Does the hon. Lady agree that many companies do not disclose as openly as they might that policies are subject to an open-market option? It appears in small print and is not always pointed out to policyholders.
Ms Stuart: I agree, and the option should be made clearer. Most estimates suggest that more than 50 per cent. of those purchasing annuities do not get the best rate. The market for annuities is growing rapidly. In 2001, it was estimated to be worth some £8 billion. I expect the market to grow, not least because more and more company pension schemes are moving to defined contributions, rather than the more traditional defined benefits system. Government policies that encourage personal and stakeholder pensions will further that trend. Some estimates suggest a growth rate of 20 per cent. a year.
I support annuities as a vehicle for providing income, but we must make them work better. That will not benefit only the better-off as is often argued, but will improve annuities to help the less well-off. One improvement that may not require legislation is the provision of much better advice. I have already said that once a decision has been made, it is irreversible. Many people reach retirement age and are faced with complex decisions that they are simply not equipped to make. We should make it mandatory to take advice before final decisions are made. Ideally, such long-term decisions should be reached after lengthy consideration of options, but I accept that only those with larger sums of money available will have long-established relationships with financial advisers.
It is essential that forms are more easily understood and standard forms must ask the essential questions that will enable individuals to obtain the best rate available for their chosen annuity at the time of purchase. The present forms vary greatly in the language that they use. Many do not spell out the facts, and the language used is not uniform. The Association of British Insurers made a first step in the right direction when it proposed that all pension providers should clarify the availability of the open-market option. We should go further. For example, the proposal still does not ensure that members of occupational defined contribution or group personal pension schemes are choosing the right annuity or getting the best rate.
We need to ensure that before the final decision is made, everyone has answered the important basic questions to determine what kind of annuity is best for them and how they can obtain the best rate available for their chosen annuity at the time of purchase. That raises the question of how the advice is to be paid for. Currently, annuities carry an initial commission of, on average, 1 to 1.4 per cent. but in some cases it can be as much as 2 per cent. For an annuity of, say, £25,000, a sum of at least £250, or as much as £500, is deducted by the annuity provider even if—as is often the case—no advice is provided at all. For those who do not use an independent financial adviser, such a sum would be available to pay for advice. People in the industry say that for fairly straightforward settlements, a two-hour session would be sufficient. I accept that, at present, there are not enough advisers to meet the potential demand, but I see no reason why that should not change. As more people require the advice, the market will respond.
How do we ensure that the best rate is available? IFAs already use services that provide essential information. We need an extension of the database, with some safeguards, to ensure that rates quoted are reliable. That should not cause great technical difficulties. Close consultation with insurance companies and annuity providers is essential, but I cannot see any major problems. We need a commitment by the industry to have an annuities exchange and to provide the database so that people can access it and get up-to-date information. Again, I see no reason why that could not be policed by the Financial Services Authority.
To make annuities work better, we need to move towards a standard form of wording to help everyone to understand their options and a requirement to take advice before a decision is made. That must be combined with the pooling of information on annuities and the returns available at any given time in a way that is easily accessible and reliable. Those suggestions would improve the workings of the annuity system.
In the long term, the Government ought to be far more radical in overhauling the system. First, there are far too many different and often conflicting rules governing the annuities of different parts of one's pension. Rules need to be harmonised to provide a single set of rules for the various elements of an annuity.
The insurance industry itself has to improve its administrative systems. It often takes months for providers to transfer sums. The ABI initiative in this context is welcome, but it should be a mandatory requirement to prevent unnecessary delays and cumbersome administration. As I said, sometimes the best open-market rates available on a Monday may not be the best on Friday. However, companies sit on any request for months on end. That means that it is not only difficult to find the best deal but difficult to implement it practically.
We must establish a system that enables people to keep track of their old pension entitlements. That must strike a chord with everybody in the Chamber. If we all stopped to think, we would find that we have accumulated an array of pension entitlements during our working lives. I see no reason why we could not consider a system for updating the record of entitlements together with the issue of the P45.
In the long run, a process that makes it clear to people that they need to start planning early, and that the company that provides the saving vehicle during their working lives is not the same company that then pays their pension, is essential. That must be addressed by the Government, employers and the industry collectively. Far too many people assume that because their savings have been made with one company during their working lives, that company will also be the best provider of their annuity; far from it. However, no one agency can do that alone.
Income drawdown charges are far too high and investment-linked annuities should be made transferable. I welcome the thinking behind clause 1(7), particularly the provision that money may be withdrawn from the retirement investment fund at any time. I am attracted by the argument that once basic provisions have been made—for example, the requirements for a minimum retirement income; we can have endless arguments about how that is determined, and there are mechanisms by which we may do that—there should be a greater freedom on how the rest of the capital is used and invested.
The current age limits for retirement are increasingly out of step with people's wishes and lifestyles. Some people want to stay in work longer, or combine working and partially drawing on their pensions. For example, I see no reason why we should not allow people to take the lump sum separately from the rest of the pension. People could partially retire and live on the capital from the tax-free lump sum at first, and then annuitise the rest of the pension later when they finish earning altogether. That is currently not possible. Much greater flexibility at the point of retirement is needed to reflect people's wishes.
| Next Section
| Index | Home Page |