Q and A: Why reform the annuity market?

Q What is an annuity?

A An annuity is a financial product that pays a guaranteed income for life. It is most commonly used by people with private pensions to convert their lump sum payment into regular income. Annuities are becoming more popular as final-salary pensions have died out in the private sector. Annuities can vary depending on your lifestyle. Some people are entitled to enhanced annuities if they have a shorter life expectancy.

Q Why is the government proposing to shake up the annuities market?

A There have been a number of warnings about the annuities market, most recently a consumer watchdog claiming that regulators were failing to prevent people being ripped off. Confusion over what to expect and the fact this is an irreversible purchase are concerns. But changing life expectancies and the need to guarantee income levels in a low interest rate environment are major challenges for providers.

Q What other changes are the government proposing?

A The government is keen to see more transparency, mixed pension arrangements, collective pensions and “mega funds”.