The cost of turning pot to pension

pot to pension.jpg

Pots get broken


I’m pleased to hear that Scottish Widows are planning to open their standard annuity product to the open market (previously only Scottish Widows customers could access this product).

Their marketing people tell us

It will be available directly from Scottish Widows, and via third party portals Iress, Ipipeline, Annuity Exchange, Retirement Line, Tomas, and Synaptic Webline. Hargreaves Lansdown will continue to only offer the enhanced version.

Currently for a £100,000 pot, Scottish Widows standard single life level annuity, guaranteed for the first five years, will buy an annual income of around £4,100 for a 60-year-old, rising to £4,900 for a 65-year-old and £5,600 at age 70.

Money Marketing informs us that best market rates for the same individual were £4,051, £4,654 and £5,443 respectively. This information came from Hargreaves Lansdown.

Shopping around when buying an annuity, rather than sticking with your current provider, gets you the best rates, however data from the FCA found more than half of customers (57 per cent) chose not to shop around in the six months to March 2018.

Is this very surprising? Re-reading these opening paragraphs I can’t help thinking that most of my readers are already losing the will to go on!

People are turned off annuities but still want a lifetime income in retirement

Since announcing that nobody will ever have to buy an annuity again in 2014, the Government has effectively blighted the annuity market.

.We know from research from organisations as diverse as Aon and Tilney Bestinvest that around 60% of people – when asked what they want as a retirement income describe an annuity, currently only a fraction of that number buy one.

I agree with Scottish Widows’ Emma Watkins when she says

“It may take a generation of people seeing their parents run out of money to see the benefits of a guaranteed income again.”


A practical intervention from Her Majesty’s Treasury

One of Government’s hidden jewels is the Government Actuary’s Department. It is small but perfectly formed and is as close to infallible in what it produces. I trust it, others trust it – it is a genuine independent source of information. It is ideally placed to help people understand the cost of turning a pot into a pension.

Looking back, I first wrote about this in 1998, when I called on Government to coin a currency called the Pension Pound. The idea was – and remains- simple. The Government publishes a conversion rate like the pound/dollar or pound/Euro but this time for Pounds/Pension Pounds. The Pension Pound would be the cost of converting a pound in the pocket to a pound per year for life. The only input variable would be your age – so we could have a 60 year old pension pound , a 55 year old pension pound and so on.

The output variable would be the cost of a pension pound which would fluctuate depending on longevity assumptions and the price of the price the Government was prepared for your money (the gilt rate).

It wouldn’t be a live currency, I’m not suggesting that the Treasury start issuing longevity bonds to the public, but it would be a piece of information that could be used by anyone interested what the bottom line was as income from their pension pot.

The Pension Pound rate (or GAD pension conversion factor – as I’m sure the industry would want to call it) could be published alongside any pension statement or illustration of prospective pension from a pension pot.

It would be a single number based on a default position (perhaps single life – unisex with CPI inflation protection). Other numbers could be available on a click through , a published URL or a Q code.

The benchmark conversion factor

Any annuity broker (including the few IFAs who actively promote annuities) would be able to refer to the Pension Pound as a starting point. Using the open market, enhanced annuities and fixed term annuities, they could create income solutions that would better suit their customer – showing how they added value.

For customers who are shopping around for a guaranteed rate, the search may stop with the annuity broker, but many people will look at what can be achieved by staying invested and drawing down from an invested fund. That is fine – so long as the risk free benchmark has been established and opportunities for enhanced annuity options explored.

But right now that is not what people are doing. People are either going to IFAs and straight to drawdown or they are stripping out tax-free cash and leaving the rest of the money abandoned like some airplane in the desert


Not adding much value

Demand for a guaranteed lifetime income persists.

Latest FCA figures in 2018 show a modest 1 per cent increase in annuity sales in 2018, with 34,000 purchased. .

This compares with the over 100,000 people not buying an annuity.


The disappointing news for Government is that of the 135,000 people looked at only 71,000 are even trying to take an agewage from their savings. of those that are – around 40% are buying annuities.

This tells me that a very large number of people are simply not doing much about protecting themselves from older age and are stuck with cash in the bank and money with a provider with no financial plan whatsoever.

Helping those who are stuck

If the FCA want a simple solution to the problems they are encountering in the Retirement Outcomes Review (and indeed their review of RDR), then they might want to have a word with GAD about the feasibility of publishing a benchmark pension pound rate as described above.

Like the AgeWage score that I am advocating as a way of looking a pension savings, it could become authorative, easy to use and a spur to take action (such as going to an IFA, speaking with an annuity broker or taking up the option of a Pensions Wise interview.

Right now – FCA priority must be to activate those people who have money saved , are winding down from work and have a genuine need for help. Many people are simply stuck and need a nudge.

Initiatives such as the publication of Pension Pounds are precisely what is currently needed.

time to choose 2

A tarnished phrase



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, age wage, annuity, pensions and tagged , , , , . Bookmark the permalink.

4 Responses to The cost of turning pot to pension

  1. Derek Benstead says:

    And if NEST started a collective defined contribution scheme, converting the pound in your pocket into a pound a year for life is exactly what it would be doing, it would make the Pension Pound a reality.

  2. henry tapper says:

    Thanks Derek – quite agree

  3. henry tapper says:

    To your point, in a recent member survey, an alarming proportion of NEST members thought that as NEST was the Government’s pension – they would get from it – a Government pension. How silly of them (not)

  4. Terence P. O'Halloran says:

    The ‘Pension pound’ would merely add to the public confusion. Much of the internal cost of providing service or product is the cost of defending the body providing it with regulatory baggage, most of which is “cover the backside -seldom read – even more rarely understood and therefore unnecessary. The compensation culture is out of control; and the imposition on the financial services profession is impeding, rather than assisting, the provision of pertinent counselling with clients.
    Please, from the heart, no more clever ideas.
    You are an actuary Henry; what is the regulatory premium on pensions advice from a qualified professional including Indemnity cover? How much does it cost Scottish Widows, or any other provider, to comply with regulation (both now and when some interfering busy body changes the rules retrospectively)?
    If that cost was not there what level of annuity could be offered? Oh! and please do not omit to take account of the gender risk.
    I was not directly involved but I took careful note of the miners’ pension scheme debacle. The miners were told to worry about their pension scheme funds being hijacked, they got out. The miner’s choice. IFA’s, not union officials, lawyers or actuaries, or bankers, no- IFA’s, paid the price. Someone, retrospectively, decided that to leave the miners’ pension scheme was a bad idea. Now we have the steel workers in the same position, and you wonder why people do not ask for advice.
    Pension planning should be about people. It is almost entirely about regulation and cost.
    Please answer my questions. What is the regulatory premium and how much more could be paid in an annuity if the regulatory costs were not there?

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