Pre-Budget Report should signal annuities shake up

Ahead of next week's Pre-Budget Report, Age Concern and Help the Aged is calling for changes to tax rules and a radical shake up of the annuities market to give hundreds of thousands of people with small pension funds a better deal.

The recession has thrown the spotlight on annuities, with stock market turmoil and falling interest rates hitting annuity rates and reducing the value of pension savings. Yet calls for reform have so far failed to address the needs of those with modest pension savings who cannot afford to wait before cashing in their pensions or who need to draw down their pension early because of redundancy or ill health.

In its new report Coping with the crunch: the annuity challenge, the charity says people with small pension pots often get a poor deal from annuities due to complex regulations and unfair tax rules which mean they can face a heavy tax penalty when they cash them in. The report calls for changes in tax rules so that people with pension savings too small to annuitise can draw them in cash without being penalised.

The report also calls for a radical shake up of the annuities market, where the largest 10 firms corner nearly 90 per cent of the sector and more than two-thirds of pension providers only offer annuities to existing customers. Although the Association of British Insurers' ‘Options' programme is working to speed up the exchange of information and funds between pension and annuity providers, the charity believes more should be done to increase competition and help people choose the right annuity by:

Introducing a new online annuities brokerage system to help people choose the best deal, with access to independent advice for those who need it

Requiring all annuity providers to publish benchmark rates

Developing a kitemark scheme to ensure annuity providers meet minimum standards

With the introduction of auto-enrolment in 2012 likely to lead to a rise in demand for annuities and an increase in the number of people retiring with small pension funds, the charity is calling on ministers to use next month's Pre-Budget Report to signal a shake up of the annuities system.

Andrew Harrop, Head of Public Policy at Age Concern and Help the Aged said: "Despite the impact of the recession, the right annuity continues to offer a secure way of turning retirement savings into a stable source of income. But the tax system penalises those with small pension pots and the annuities market is hamstrung by legislative complexity and dominated by a few major players. This adds up to a poor deal for people with small pension pots. The Pre-Budget Report provides an opportunity for ministers to signal a shake up of the system and ensure it is fit for purpose when auto-enrolment is introduced by 2012."