Insurers are lobbying the Government to try and relax the rules on when people reach retirement for schemes such as Company Pension Plans and Contracted Out Benefits, that the requirement to purchase a pension income that is linked to inflation (known as Limited Price Inflation - LPI).
Providers are arguing that inflation linked annuities are not good value at the moment because of the lack of availability of Index Linked Gilts. In simple terms, providers receive your pension money and then go off and invest it in inflation proofed investments so that you get an inflation linked pension for the rest of your life.
It is the Government who issue Index Linked Gilts.
Annuities Explained and Our View
At the time you come to retirement, either your employer will arrange to have your pension paid to you or you will have a pension fund that you have built up over the years which will be required (after tax free cash is paid) to buy an annuity.
An annuity is where you give your pension fund to a pension or investment company and in return they pay you an income from it for the rest of your life.
The problem with Index Linked Gilts, is exactly what providers say, interest rates are low and the Govrenment is not borrowing money - therefore the availability of these gilts is making them expensive i.e. people get a smaller starting pension or it is too expensive to purchase.
The LPI issue, or requiring certain types of pension to buy index linked benefits is restrictive as it substantially makes the starting pension lower, however, we can also understand the Government stance of wishing to retain the requirement so that people do become a burden on the State if their pension does not keep pace with inflation in the future.
We suggest, and have always suggested, that a simpler way would be to set a threshold e.g. at the Minimum Income Guarantee Level - which has to be inflation linked, and then any pension you have over this can be taken in whatever format you require. This may solve the needs of both Government and Provider concerns.
Learn about At Retirement Options in the Pensions Adviser.com.
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