Concern over pension risks: Phased annuity schemes cause disquiet
The schemes, called phased annuity or staggered vesting schemes, are being promoted enthusiastically by pensions salesmen and financial advisers.
Income from pension annuities is at historically low levels because interest rates are low. People who commit themselves to annuities at today's rates may be tying themselves to a low level of income relative to what might be obtained in a few years if interest rates rise.
Advisers are devising complicated packages where the pensioner cashes the fund money gradually over a period of years. Substantial amounts of the fund remain invested in the hope it will grow at levels sufficient to buy a rising stream of income from annuities in future years.
However, the schemes are complex and normally involve charges. They can also go disastrously wrong if too optimistic a view is taken about the rate at which the invested pension money will grow. If it is low pensioners could, at worst, find they run out of money to buy annuities after a number of years.
Colin Hawtin, head of policy at Lautro, said the regulator was concerned to ensure that insurance companies promoting the schemes through their sales forces and to independent advisers should make the risks clear.
'There are a number of concerns,' he added. 'It is right to point to the downside as well as the advantages.'
He said the issue would be discussed at a meeting of a Lautro standing committee next week. The committee would decide whether to recommend to the Lautro board that the regulator issue an enforcement bulletin to members warning them to ensure their marketing literature made the risks clear.
Fimbra, the regulator for independent advisers, has warned its members about misleading investors over staggered vesting.
In a special briefing note on the subject, sent out at the end of last month, Fimbra said: 'We are concerned that literature tends to emphasise the various advantages but does not give adequate risk warnings, does not state some of the important assumptions and does not detail potential disadvantages.'
Fimbra also said that illustrations of the benefits of staggered vesting schemes must use only the rates of investment growth specified for investment quotations by Lautro under the Financial Services Act. These were 8.5 and 13 per cent for pensions.
These prescribed rates are intended to give a conservative and an optimistic view of investment prospects.
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