Is the disruption over? Can the annuity be challenged? We think so!

Anyone looking for a unilaterally agreed solution to the problems we are having turning pots to pensions, shouldn’t spend an hour listening to this debate. They should turn the clock back to the start of 2014 and go and buy an annuity.

Anyone who is wrestling with the problems of offering informed choice to the 700,000 Brits who move into reliance on savings and pensions each year – should listen and consider alternatives.

Watch our debate here

Four fellows searching for better!

Put on a call an alumni of the World Bank, a strategist for a leading fund manager, a leading actuary pioneering CDC design and a rank amateur who has a pot to pensions problem and you get a thoroughly entertaining and thought provoking discussion. I urge you to press the link above and find out for yourselves.

Arun Muralidhar buys his pension from the Government

Arun’s view is that many people, the idea of joining a pension fund and making difficult choices about what to do with your pot, is beyond most of us. We should content ourselves finding out what we need to spend to get the income we need when we retire and go about the job buying SeLFIES, strips of income payable for 20 years by a Government with a defined promise at a defined price.

The proof of concept is Brazil where this system of pre-funding a wage in retirement is going down very well. It offers people a great deal of flexibility as the SeLFIES can be sold on if you change your mind or die before they have expired. Their shortcoming is that they do not include protection against you living too long. They are “Hotel California” – you can check out – but you can never leave.

Simon Eagle buys his pension from his pot

While Arun’s solution provides certainty, it’s certainty that Simon would have us swap for the more ambitious pension that he plans to give us from our pot by continuing to invest our money to and through retirement by staying in the market.

CDC pensions aim to provide more income than an annuity but there’s a trade off, you don’t quite know what you’re getting for your money so if you want a guarantee – stay well clear.

Of course , most people have been taking a lot of this risk because of pension freedoms. Putting your pot savings and relying on interest rates to pay you a pension can’t be said to provide much certainty, nor can drawing down a pension from a portfolio of stocks and shares. Simon’s solution builds on a century of experience funding pensions through investments , detaching pensions from the insurance of an annuity and harnessing the power of collecting people together to provide protection against our outlasting our savings.

Henry tries to make sense of these polarised positions as a consumer

If I was coming at pensions with no interest in investment and an interest in getting the job done, I would prefer the no nonsense approach of Arun, I would swap my pot for an income that lasted as long as I could foresee at my 65th birthday and hope for the best after 85. I like the precise cost of a SelFIE and I like the precise benefit. It’s easy, clean and gets most of the problem out of the way.

As I am coming at this, with a lot of pensions knowledge, I think I could do better and favor Simon’s solution, believing that over time , markets will outperform the promise of the SelfIE. But the SelfIE is a good alternative as a benchmark to the annuity rate as it gives me the flexibility I wanted when George Osborne told us “nobody will have to buy an annuity again”.  If SelFIES and CDCs became the book-ends of my retirement choices, I would not be sorry! I can slot annuities and drawdown into my choice architecture without too much difficulty so long as I am clear what the choices mean.

Stefan puts it all in context

I asked Stefan to introduce and conclude the meeting because he provides a perspective on the problem of converting savings pot to pension better than anyone I know.

Stefan’s big phrase is “holding pattern” and what I have discovered in talking with him, is that no matter how we might like to have a default means of exchanging pots for pensions, we do need to choose where we land the plane. In very practical terms, money cannot be paid to us without us telling the source our bank details.

If we accept that some kind of intervention is needed, we accept that getting paid our money back requires more work than paying our money in (where a nil-response = auto-enrolment),

Stefan would have our savings invested with due regard to all options – drawdown, annuity , CDC – even Selfies with the key features of the holding pattern being the liquidity to encash when required and “no nasty surprises”.

While we work out how to present choice to people, Stefan would have pension professionals establish a holding pattern that puts as many of these choices in play- as possible.

Is no news – big news?

While we were having our debate, Standard Life announced that there answer to the problems we are having is to relaunch its individual annuity. It’s a no news story but I am quite sure that it will be big news for Standard Life- because there is now considerable pent up demand for a wage for life to make buying an annuity.  As with superfunds, the reluctance of Government to permit alternatives, could return the conventional annuity to its default status,

The timing of Standard Life’s re-launch is propitious as interest rates are likely to be close or at the peak of the current cycle and it may be that annuities reclaim some of their previous hegemony over private savings. But they start from a low base – only one in ten of us are swapping a pot for a guaranteed pension.

Our debate is played out in the shadow of insurers who typically have their way. Our challenge is to establish a meaningful alternative to the insured annuity.

Knowing Claire Altman as I do, I am quite sure she understands “the wider toolkit” includes the ideas we are debating. In the 7 years since the freedoms were announced, there has been no big idea to challenge the annuity as a “wage for life” for the common person.

Judging by our debate, the will to challenge the annuity is still there, now we just need the help of legislators and regulators to provide solutions -not just disruption!

Watch our debate here


About henry tapper

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