ADAM UREN: After years of attention, could annuity switching provide a solution to the single-life scandal?

Steve Webb has once more got people talking about pensions with his call to allow retirees to switch annuity products if they're unhappy with their deal.

His statement prompted a fair bit of incredulity from the insurance industry, which has argued it could actually cause payouts to fall as annuity providers price in the pecuniary risks that accompany someone who wishes to switch part-way through a lifetime product.

They actually have a valid point. Adding extra costs for providers to factor into their annuity pricing at a time when people are already seeing rates suffer due to rising life expectancy could be another blow to defined contribution pension savers.

Scandal: Thousands of pensioners were sold annuity products that left their partners penniless when they died.


James Auty, of JLT Employee Benefits, explains that annuity providers would not only have to pass on transfer costs to customers, but would have to build into their pricing the risk that a person will look to switch their products at an opportune moment.

In all likelihood, the majority of people who do switch would be unlikely to see any improvement in their rates once these extra costs are taken into account.


Mr Auty said: 'If a guarantee [that they can switch] is included then the insurance company will assume that the annuitant will use this when it is most beneficial to them, such as a change in their state of health or a rise in interest rates.

'The danger is that the inevitable increase in annuity terms by insurers to allow for this guarantee would be more detrimental than the value of the guarantee itself.'

There is a counter-argument to this is that, if people were allowed to switch, it could see better offers made as insurers attempt entice customers away from their rivals.

Insurers don't currently have the same incentive to compete as they're still largely working with a captive market. It's still the case that half of people buying annuities take the (often poorer) offer they get from their pension provider, so of course there are voices in the industry keen to maintain the status quo.

I firmly believe that the best way to get people the most out of the annuity market is by making sure people shop around for the best deal by exercising their right to the open market option.

Even if the Government is unwilling to make using the open market option compulsory when people reach retirement, they should focus their efforts on ensuring everyone is fully aware of the option.

The impact of introducing 'switching for all' is difficult to predict, BUT, I do think people should be allowed to switch annuities when they've been sold products that are unsuitable for their circumstances.

There is no shortage of examples of people taking out single life annuities unaware that payments would dry up once they died, rather than payments continuing to their partners as they would had they taken out a joint life annuity.

This is one of the true scandals of the annuities industry and one that is only now getting the official scrutiny it deserves following years of media attention.


I think these people should be allowed to change their annuity product from a single-life to a joint-life product, even if they weren't misled by their insurer but made the mistake themselves.

As joint life annuities provide lower payments than single-life products, and taking into account the costs insurers would pass on when administering transfers, it's almost certain people would have to take a drop in their income should they switch.

I'd say that some would surely be happy with this if it meant their partner received some of their pension income after they die. It would right a wrong they are currently stuck with.

I'm sure such an idea would be met with similar incredulity from the industry, and no doubt it's far more difficult to execute than it is to suggest.

But since they were happy to sell people these policies in the first place, surely a way could be found to rectify mistakes they made in doing so.