Pensioners May Face Reduced Annuity Rates

The UK insurance industry backed by the government and Financial Services Authority (FSA) are battling the rest of Europe over a financial directive that could make already miserly annuity returns even smaller.

If the proposal becomes law, then insurance companies will be forced to tie up more of their cash reserves to strengthen their balance sheets rather than generate cash for annuities.

The UK is receiving little support from the rest of Europe over the annuity rate argument because most other countries in the EC don’t force retirees to buy annuities with the greater part of their pension pots.

One of the UK negotiators at Brussels says arguing the UK stance is like going it to a room and being punched in the face 26 times by representatives from other European states.

UK has Europe’s largest annuity market

The UK has by far the largest annuity market in Europe - backed by pension regulations that penalise retirees with a hefty tax charge if they don’t buy an annuity with at least 75% of their pension fund by the time they are 75 years old.

Annuities are good business for insurance companies because when the annuity holder dies, the pot of money left from buying the annuity reverts to the insurance company and not the annuity holder’s estate.

This is a big bone of contention for many people who have worked hard to save for a reasonable pension, who then can’t pass the cash on to their families and loved ones on their death.

However, some financial experts argue the UK will lose this disagreement because although the EC does not interfere in tax rates and domestic financial policy, regulations to buy an annuity may place UK pensioners at a disadvantage with other European citizens.

Also, British expats are allowed to transfer UK pension pots in to QROPS schemes (Qualifying Recognised Overseas Pension Schemes) that do not have the annuity purchase rule.

“The idea is the new rules are designed to stop an insurer failing,” said an FDSA spokesman. “The fall out is that to do this, insurers must have a stronger capital base and this may have an affect on annuity rates.

“It is correct someone could retire abroad and transfer their pension fund to a QROPS, which then negates the requirement to buy an annuity after five years.

“Currently there are no plans to do away with the annuity requirement in the UK.”

Pensions are a growing problem

The annuity problem is caught up with a whole bundle of pension problems for the government.

At the root of the problem is the fact that the state pension is becoming too much of a financial burden on the government purse as the baby boomer generation of the 1950′ and 1960’s reaches retirement age and the number of people paying in to the scheme reduces.

The government is also worried that if people do not have to make a pension provision for retirement, but can spend their investment how they wish, lots of them will simply spend, spend, spend throughout their lives and then expect the state to provide for their retirement.

So the annuity issue is just a symptom of wider pension problems that need resolving.

Proposals at the moment include putting retirement back to 70 years old or beyond.

This would have two effects - reducing the retirees’ pay out from the state because their claim starts later and lasts for a shorter time., which was the original intention of the state pension.

Overall this saves the government money and shifts the financial responsibilities of day-to-day living costs back to the individual who has to work longer or save harder to keep themselves for their extended working life.

Putting back the retirement age

Another proposal the government is considering is compulsory pension saving. This would mean people would have to save a percentage of their income from when they start work to look after themselves later in life.

The UK social welfare system is creaking under the pressure of not being a joined up system. It was devised in 1948 and consecutive governments have added a lot of ad hoc policies to the system without realising the problems of this kind of decision-making don’t necessarily work their way through until someone tinkers with another part of the system.