How much certainty do we need?

old people

The Government’s statement in the foreword to the DA Consultation Paper that we need more certainty in retirement is bizarre. Its obsession with guarantees is not shared by those it governs.

As an example, let’s just look at the rule that you need guaranteed income of £20k to use flexible-drawdown.

Assuming you qualify for the full state pension, this means you must have alternative annuitized income of around £14,500 which translates into £300k pension savings. For £14,500 to be “triple –locked”, that £300k becomes £450k.

So for this flagship policy easement to be a success, we‘d expect to see plenty of annuity purchasing to make good the short-fall.

But only 2472 annuities between £200-249K were purchased in 2012 (source J Cumbo-FT). This out of 420,000 annuities sold; not exactly a stampede. Considering last year’s average annuity purchase was £30k, flexible- drawdown is some way from being a universal solution.

According to LV’s Steve Lewis only 200,000 pensioners in the UK qualify for flexible drawdown, this out of a total of 10m over 65. Steve Price of SJP points out that most of the 200,000 rely on income from DB plans, (Money Marketing 08/12/13). Few of those relying on DC pensions can escape from annuity or GAD rates.

For all the talk of “certainty”, these rules actually stem from the Treasury’s fear people blow savings to pick up benefits. That’s crazy, the poorest don’t have enough pension savings for “double dipping” to matter while the idea that 98% of adults fancy pension credits is weird! People are confused and it’s no wonder so many treat annuity purchases as an afterthought (making a gift of what little they have to insurers).

Reading our Pension Minister’s recent pronouncements took me to my typewriter;

Memo to Steve Webb;

Plan A- “certain pensions” doesn’t matter; Plan B “income from elsewhere” does.


Capital drawdown– deposit accounts supplemented with tax-free cash, ISA savings and the proceeds from windfalls- PPI claims etc. 88% of inherited wealth in 2010 was in cash –(ONS)

Dividend income– UK individuals owned 11.5% of the UK stock market in 2010 (albeit down from 55% in 1963) – (ONS).

Property income –Britain now has over 1.5m private landlords (2011 Private Landlord Survey)

Business income “more than 1m business owners are shunning private pensions, relying on business earnings and other investments”. Just Retirement (08.10/12)

Earned income– the number of people working past 65 increased from 8.3 to 9.2m from 2001 to 2011 (ONS)

The income sources are market linked and not guaranteed. Apart from money on deposit, alternative sources are inflation protected and paid to dependents in full. By comparison, the majority of the 1.3m annuities set-up since May 2010 have been purchased with no inflation protection and no dependent’s pension. [Ends}

People are putting their pension savings into lock-down and organising un-pensioned income streams to match liabilities. We may have made the public rubbish at buying pensions but they’re no fools. I suspect that if people could choose what risk they took with their retirement income, they might engage a little more with decumulation,

So it’s time we had a proper discussion about retirement certainty, and work out what people really want.  Only in the public sector is the security of totally guaranteed income a genuine prospect, the rest of us seem happy to compromise.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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