The unintended consequences of the annuity revolution
Labour and Labour’s supporters are busy looking through the detail of yesterday’s budget announcement around pensions, but as far as I can see the most they’ve come up with so far is some stuff about it being a dastardly bridgehead to removal of other pensioner benefits. This seems to me to miss the bigger picture
There is little doubt that the key idea – the removal of the need for an annuities for defined benefit pensions – is politically attractive, as it can be sold as greater choice/the government not telling you what you have to do with your money. But the long term consequences of such a change are worth considering:
1) The reasons for annuities in the first place – a secure income for as long as you live, and the onus on insurance companies to work out how long that might be on average, how it might change as life expectancy increases, and price their annuities accordingly – is to be replaced by a free-for-all in which people have to guess how long they might live and plan accordingly. As life expectancy increases (at least amongst the previously somewhat better off), poverty in very old age may beckon for many.
2) While this may simply mean that many pensioners will stick with annuities as the safe option, it may also lead the the rapid development of a property-selling industry pitched at new pensioners, on the basis that fast property price increases will outdo annuities as an income source (and perhaps enable larger annuity purchase later on), even given the income tax hit if you don’t buy an annuity. I forsee lots and lots of mis-selling to vulnerable clients, given asymmetric information.
3) This could lead to a) a house price bubble even greater than the one we have now; b) greater retirement condo building c) a combination of both.
4) Most likely, though, it will lead to an even greater generational divide, with defined benefit pensioners buying up housing at ever-inflated prices and renting out to those increasingly unable to get on the property ladder.
Has the Treasury thought through the potentially massive scale of these unintended (or maybe they are intended) consequences? I suspect not, what with votes and that.