Do you have to be demented to buy an annuity?

grim reaper

This tweet is not the first time I’ve heard this argument

I heard it several times at a meeting of Financial Advisers I chaired in Bristol this week. The implication is that the fully cognitive can have freedom but the door to freedom closes as your mental health disintegrates.

The hammer blows come thick and fast in later years, you lose your driving licence, you lose your home, you move to part three accommodation and then to full nursing care. And at some point, the plans you put in place maybe twenty or thirty years before and which you have managed carefully ever since are exchanged for the product you have been avoiding.

You can hear the jokes between old folk

“you know you’re on the way out when they sell you an annuity”

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The first assumption is that people with their cognitive capacity diminishing is going to consent to be assessed for the life left in them and that their families are going to be happy to sign away inheritable rights. I see the process as potentially traumatic and while it sounds good in a conference of professional, I doubt that many later life annuities will go through on the nod.

And there is a second assumption within the tweet (above), it’s the assumption that those in mental full health in later years, want the responsibility of managing their retirement savings through a drawdown product. That they want to be worrying about the financial impact of living too long, of pounds cost ravaging, of inflation and of marginal taxation decisions.

There is little evidence that anyone, other than those who advise on these things, has any desire for these freedoms. Indeed these freedoms are not freedoms are what William Blake called

“The mind-forged manacles”

For the financially illiterate, drawdown can be a life sentence of worry. The decision to purchase an annuity becomes an admission of incompetence or worse dementia. What are we doing to the dignity of old age?

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To me “pension freedom” means the freedom not to worry. Among the hundred or so advisers I listened to on Tuesday, I did not hear any talk of this. All the talk was of the binary decision – drawdown v annuity.

Of course- to advisers – drawdown is something that needs an adviser.

Talk of unadvised drawdown was considered grossly irresponsible , as if clients when they enter retirement should have their car keys taken from and the keys to their front door.

For some advisers, drawdown seems to be the financial equivalent of a wheelchair, which the adviser pushes.

The annuity becomes a terminal bonus (for the adviser), there’s no more need for the wheel-chair, the patient is confined to care and the adviser gets a one off commission for the sale of the insurance policy.

I am  nervous about pension freedoms for myself and for my generation.  Because I know how hard it is  for my parents and their generation, for whom financial decision making is relatively easy.

Many in their eighties and nineties have never completed a tax return, their budgeting is based on amounts paid into their account from insurance companies, pension scheme trustees and the state. There is no need to manage the income, managing the spending is hard enough.

For my generation, it will not be the reassurance of an insurance company or pension fund payment hitting my account, but the insecurity of a balance statement telling me of the risks I am running drawing money at my current rate, of continuing with my current investment strategy, of the inheritance tax implications of my every decision.

I’m sorry advisers, but this is not how I want to live my reclining years.

I don’t want to be dreading the arrival of my drawdown statement, I don’t want to log on fearing bad news, every time I hear the markets are down. I want to know that I can look after my family and enjoy the freedom of not having to worry about all these things.

Which does not mean I want to buy an annuity- thank you very much!

If annuities are for the demented, I’m not going to buy one of them any time soon, not so long as I keep fighting for my cognitive faculties – don’t take my keys away from me!

Why should old folks be sold dud insurance policies – just because they’re screwing up on drawdown? What kind of deal is that?


Target pensions

target pensions

This is why we need a new kind of product that gives me the freedom to enjoy my retirement without my having to throw away the keys or worry about stock markets. What I want is what my parents had, a pension paid out against a target which in good years paid a little more and in bad years paid a little less, but generally rewarded them properly for their hard work and financial prudence over their careers.

I speak with a lot of older people at the moment and ask them about risk-sharing. They entirely get the fact that there are good and bad years for financial markets and when times are tough, they will get less and will spend less. They understand the reverse is true.

Put to my parent’s generation, the idea of a risk-sharing pension which could down a little or up a little but is paid every month, is exactly what they want. Compared to an annuity or drawdown it is precisely what they most people would go for.

Which is why it is so important that we continue to legislate for collective schemes that allow people to be paid these target pensions. I am totally uninterested in CDC as a means of accumulating cash in work, I am now totally focussed on getting a non-advised alternative to drawdown and annuities for the mass market of people who do not want to worry about drawdown and the grim reaper’s regular call – with an annuity cheque.

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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Do you have to be demented to buy an annuity?

  1. Brian Gannon says:

    what assets would be used to provide this targeted pension? how would cataclysmic drops in the overall shared pot do if losses were never recovered? would it basically be like with profits where previous free assets were used to prop up bonuses in the bad periods and then returns reduced to recover the deficits when there are good periods? how does the actual investment work with shared or pooled risk?

    • henry tapper says:

      Brian

      There is no pension system that can be 100% future-proofed, even State PAYG (ask the Greeks). That said, it is possible to run CDC with a fair degree of certainty – the simulations that have been carried out by Aon Hewitt suggest that there have been only 2 years in the past 100 when nominal cuts in the pension paid would be needed. For the most time- shock can be absorbed through conditional indexation.

      I cannot suggest the precise asset mix but would hope that it would be more equity based than typical DB schemes.

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