Who’ll blow the whistle on the annuity fiasco?

Ros Altmann has got a lot of stick from pension folk for feeding the bad news on annuity rates to the Daily Mail, resulting in this front page.

Dail Mail Annuity

Ros is being pilloried for bringing pensions into disrepute. I dont get it.

The “stark wake up call” is no more than a statement of fact and annuity rates are at an all-time low.

And unless you have a very tiny pot (with less than £18,000) or a reasonably big pot with upwards of £150,000, an annuity is what you really have to buy.

I grossly simplify of course, if you  want to understand just how arcane the rules about “trivial” pensions with “de minimis” amount are, check out the detailed rules here (thanks Scottish Widows)

Why I side with Ros is that she is right, none of her critics is denying she is right and nobody in the country can disagree with her analysis (whether journalist, reader or pension expert).

Why I side with Ros is that the reason annuity rates are so low is mainly because of Government

  1. The Treasury driving gilt prices up through Quantitative Easing
  2. The EU demanding insurers increase their costs through the solvency regs
  3. Unintended consequences of the Test-Achats case equalising male and female annuity rates (to general detriment).

But worse than that, while Government has driven 500,000 fish into the annuity barrel, they have given them no escape hatch, so when the fish-shooters, or seal-cullers or whatever phrase we want to use about the cheap and nasty end of the at retirement market, set up annuities at below best of market rates, the results can be catastrophic.

Let’s not forget that for all that the ABI code guards against, people are still purchasing the wrong kinds of annuities at the wrong price at the wrong time and when they do- yes- they will have to live till 90 to recover their money.

Why I side with Ros is that she is the person who has bothered to get to the Daily Mail she’s the one who has their respect and frankly WHAT SHE SAYS NEEDS TO BE SAID.

In case anyone’s in any doubt, buying an annuity today involves a major financial loss to the purchaser.

What you are doing, in layman’s terms is handing over your pension savings to someone who lends your money to Government or big business at a rate of 0.5% pa or slightly above.

Because 0.5% doesn’t generate much interest, you are now getting a fraction of what you got for your pension pot a few years ago- check this graph.

annuity5

No matter how you want to illustrate the  increasing cost of buying the pensions the facts remain the same. From a high point in the late 90’s when it was possible for a man at 65 to get £100pa from a £1000 pot, rates have fallen so that he’d be lucky to get half of that if he bought today.  Here is a table that shows how annuity rates have changed over the past 13 years.

annuity 4

But while the market has collapsed, the Government has done nothing to let the fish out of the barrel. While first time buyers have new housing schemes to get them on the housing ladder and job seekers get a hand up to get them back to work, there has been no Government new thinking on how we buy pensions in the last 25 years.

Since the inception of personal pensions in 1987, the way we buy our pensions has remain unchanged, the value of an annuity has fallen through the floor and the investor has the rest of his or her life to feel the consequences.

This is why I side with Ros. Because all this time that we pension experts have stood by and let this catastrophy happen, no-one has been going to the DWP and the Treasury and telling them there is another way.

Until recently that is. What David Pitt-Watson is banging on about is that the Dutch CDC system produces better pensions because it does not require people to lend money to Government and big business at 0.5%, nor does it rely on the individual underwriting of the British system, nor does it get hung up about gender equalisation or Solvency II.

Yes , the Dutch people have to accept that their pensions in payment may go down as well as up, but when they start 50% higher than their UK equivalent, a fall of a couple of % is inconsequential (relatively).

We accept that house prices can go down as well as up, wages can go down as well as up, the price of petrol can go down as well as up so why can’t we accept that the level of our retirement income can go down as well as up?

Why has the Government and the pensions industry refused to allow new ideas into pensions so we can have collective decumulation products as well as collective accumulation products?

Why has Alliance Bernstein sat with their collective decumulation product on the stocks for the last 18 months (which takes the floor for drawdown from £150 to 25,000?)

Why does the ABI rubbish Collective Decumulation and senior policy folk in UK insurers throw rocks at David Pitt-Watson?

It is for the same reason as Ros is being pilloried, it’s because we hate to admit that we have got it wrong, that the public have not been given the choice that they need and deserve.

My partner, Stella, said a smart thing when Steve Webb asked her what she would do to improve DC outcomes.

She told him that the only guarantee that someone needed in retirement was the guarantee that they could buy a guarantee.

Put another way, the default position for an individual with a retirement pot should not be a guaranteed annuity but a pension paid from the pot according to the means of the pot. More properly a pension paid from a vast array of pots according to the collective ability of the array of pots.

This makes so much common sense and I suspect it is where we will end up.

But before we get there, many hundreds of thousands of people will have to be shot in the barrel, have to buy the wrong kind of product, at the wrong time because there is no alternative.

A massive failure of Government and the industry which the Daily Mail is right to point to.

As for those who throw rocks;- lay off Ros Altmann and ask yourselves what you’ve done lately to make for better pensions for those retiring today.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in actuaries, advice gap, annuity, auto-enrolment, pensions, Personality, Popcorn Pensions, Public sector pensions, Retirement. Bookmark the permalink.

16 Responses to Who’ll blow the whistle on the annuity fiasco?

  1. What’s she on about – I reckon you have to live to 94, about 9 years beyond your life expectancy answer: keep the money in shares and live off the dividends

    Date: Thu, 15 Aug 2013 05:56:03 +0000 To: david_a_hargreaves@hotmail.com

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