Old money shows its worth

Katherine Griffiths: 'To scrap compulsory annuities would allow people more freedom to invest for their old age'
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There has been a lot of fuss in some circles this week about pensions. The excitement stemmed from rumours that the government is about to change the rules which govern pension funds.

There has been a lot of fuss in some circles this week about pensions. The excitement stemmed from rumours that the government is about to change the rules which govern pension funds.

The current rules, called the minimum funding requirement (MFR), effectively mean that fund managers have to invest large chunks in safe but poorly performing gilts - packages of government debt. They were set after Robert Maxwell raided the Mirror Group's pension fund.

Pulses have raced because the City expects the MFR to be relaxed, so fund managers would be able to invest more in shares, which are more risky but have much higher rates of growth than gilts.

To account for the greater risk, a central fund has been proposed to act as insurance, which would pay out if a fund bombs into the red. On the surface, this sounds promising for everyone, as putting more zippy equities into pensions funds should mean a larger end product for all.

Sadly, it is not so. The MFR applies to occupational schemes, which only 22m people in the UK belong to. The rest of us have to make do with a private pension and we would be justified to feel a bit left out by this week's fuss.

People in company schemes are lucky enough. They belong to the gold standard of the pension world - even their employer contributes to their retirement income. In contrast the rest of us are often faced with high charges and with no extra boost of extra contributions. We doggedly follow this up by buying one of the meagre annuities on the market, depressed by the low gilt yields and the fact that we are living longer.

It is a situation which is in need of reform just as urgently as the MFR - more so, many would say. But what can be done? The Government should take steps to lower the price of gilts, making annuities less expensive. Changes to the MFR should have that effect, because widening the criteria for what pensions can be invested in will take the pressure off gilts.

But a more direct reform would be to overhaul the whole annuity structure. The requirement that everyone must buy an annuity by their seventy-fifth birthday has been in place since the war. These days people are living longer and retiring earlier and wealth in real terms has accelerated.

It would be possible to scrap compulsory annuities, allowing individuals more freedom to invest for their old age.

The Treasury is looking at this idea. But it may be too radical for Gordon Brown, who would have the judders at the idea of a surge of profligate senior citizens squandering their pension fund on holidays and fast cars, only to fall back on the state when the money runs out.

There are other more conservative possibilities. One would be to reduce the amount of the pension pot that must be put into the annuity. At present you can keep 25 per cent of your lump sum. That could be doubled while still ensuring that you are providing yourself with a cushion in case the urge to spend comes upon you, or your investment decisions do not work out.

Sadly these changes were not tipped for imminent action in this week's rumours. But they are there behind the scenes and the Government knows that Britain's greying vote will be one it wants to capture at the next election. It is time to start writing to your MP.

* The carpetbaggers are back in town and Standard Life is under renewed attack. While the latest rebels have held off from tabling conversion resolutions, they say they will go ahead if Standard Life does not divulge certain information.

It is easy to force a mutual life company to have a vote on demutualisation - it only needs 50 policyholders to support the necessary requisition. But even if the carpetbaggers at Standard Life carry out their threat, they will not succeed? Standard Life won resoundingly last time, so surely they would again?

Not necessarily. The small matter of endowment letters, which all providers are obliged to send out to about 5m people this year, telling them that if their policy is on track to pay off their mortgage, could change a few minds.

Standard Life - which refused to distribute the letters during its pro-mutual campaign - is due to send out 10,000 letters to unfortunate people who are very likely to face a shortfall and a further 530,000 who may well have to top up their mortgage.

This may leave many thinking that a windfall - created if the mutual converted - could come in pretty handy.

This cannot be denied. While circumstances may have changed due to the endowment letters, the arguments remain the same. If your policy is near maturity and you have just been informed that you need an extra £10,000 to top up your mortgage, press for conversion as your windfall would be substantial. If you are in the early years, the benefit is far smaller.

Standard Life has had its fair share of grilling. Other mutual life companies could be in for just as rough a ride.

* John Willcock is away

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