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There are at least two big implications from George Osborne's Budget announcement that annuities will no longer be the only practical choice for most people looking to secure an income in retirement.
The first is obvious and concerns incentives. Critics have been warning for a while that very poor income levels from annuities—thanks to ultra-low interest rates—and the fact that the rules effectively compel most people to use their pension fund to buy an annuity add up to a fatal combination. Savers are increasingly aware that they are being corralled into purchasing an extremely unattractive product that they will be stuck with for the rest of their lives. The danger is that they simply give up on pension saving entirely, as some have already done.
So the prospect of greater flexibility and autonomy for pension savers starts to set up more positive incentives for people who want, as Mr Osborne put it, "to do the right thing".
The second big implication is perhaps less obvious but to my mind more important in the long run. The dominance of annuities as a way of funding retirement—until recently backed by the legal obligation to buy one by the time you reach 75—has not only acted as an unwelcome restraint on individuals' freedom to make their own decisions. It has also constituted an absolute barrier to innovation in the way we fund retirement. Why bother developing a better, more flexible product for pensioners if they were going to be legally prohibited from buying it?
Now that the stranglehold of the annuity providers is about to be loosened, I hope we will see a fresh wave of innovative thinking in how to provide long-term income and the structures that will best achieve that goal. This is the opportunity for competition and unorthodox thinking to reshape a market dominated to date by a single, utterly inflexible, approach. That is an extremely welcome development.
However, the fact remains that for many people the phrase "financial innovation" provokes a powerful sense of foreboding. For that reason, another of the measures the Chancellor announced will be equally important—the right for those who retire to receive free, impartial, face-to-face advice on their options before they commit their funds.
Growing flexibility and choice for pensioners holds out the prospect of more satisfactory outcomes for more people—but only at the cost of making the market more complex for them to understand and navigate. Exercising choice effectively means knowing how to make the necessary comparisons. So any gains we make from greater diversity will only be secured if people are helped to overcome the additional complexity it will bring with it.
There is much still to do in the pension system - not least the fact that the UK has far too many small schemes. These fail to capture any economies of scale for their members and also require a far bigger group of competent trustees to run them than we can reasonably hope to find. Fewer schemes run by higher calibre trustees would do a great deal to help the situation.
But shaking up the annuity market is a good start. Now let's see how savers and the financial services industry respond.
There are at least two big implications from George Osborne's Budget announcement that annuities will no longer be the only practical choice for most people looking to secure an income in retirement.
The first is obvious and concerns incentives. Critics have been warning for a while that very poor income levels from annuities—thanks to ultra-low interest rates—and the fact that the rules effectively compel most people to use their pension fund to buy an annuity add up to a fatal combination. Savers are increasingly aware that they are being corralled into purchasing an extremely unattractive product that they will be stuck with for the rest of their lives. The danger is that they simply give up on pension saving entirely, as some have already done.
So the prospect of greater flexibility and autonomy for pension savers starts to set up more positive incentives for people who want, as Mr Osborne put it, "to do the right thing".
The second big implication is perhaps less obvious but to my mind more important in the long run. The dominance of annuities as a way of funding retirement—until recently backed by the legal obligation to buy one by the time you reach 75—has not only acted as an unwelcome restraint on individuals' freedom to make their own decisions. It has also constituted an absolute barrier to innovation in the way we fund retirement. Why bother developing a better, more flexible product for pensioners if they were going to be legally prohibited from buying it?
Now that the stranglehold of the annuity providers is about to be loosened, I hope we will see a fresh wave of innovative thinking in how to provide long-term income and the structures that will best achieve that goal. This is the opportunity for competition and unorthodox thinking to reshape a market dominated to date by a single, utterly inflexible, approach. That is an extremely welcome development.
However, the fact remains that for many people the phrase "financial innovation" provokes a powerful sense of foreboding. For that reason, another of the measures the Chancellor announced will be equally important—the right for those who retire to receive free, impartial, face-to-face advice on their options before they commit their funds.
Growing flexibility and choice for pensioners holds out the prospect of more satisfactory outcomes for more people—but only at the cost of making the market more complex for them to understand and navigate. Exercising choice effectively means knowing how to make the necessary comparisons. So any gains we make from greater diversity will only be secured if people are helped to overcome the additional complexity it will bring with it.
There is much still to do in the pension system - not least the fact that the UK has far too many small schemes. These fail to capture any economies of scale for their members and also require a far bigger group of competent trustees to run them than we can reasonably hope to find. Fewer schemes run by higher calibre trustees would do a great deal to help the situation.
But shaking up the annuity market is a good start. Now let's see how savers and the financial services industry respond.
