I’m not above giving two plugs to my good friends, David Orford, Jim Hennington and Peter Rowe’s new book. That Q code works and I’ve bought the book,
Unlike Australia, the UK does have an annuity culture. The state annuity is of course the state pension , millions of us have wage for life company pensions and recent research from Scottish Widows suggests that 80% of us want a guaranteed income for life from our workplace pension.
People like the idea of getting a pension but they don’t want to buy one. The concept of “money purchase” hasn’t taken off in the UK, Peter Glancy of Scottish Widows observes wryly of the 1500 savers Widows surveyed.
80% said they wanted a product which provided a guaranteed income for life – yet only a minority of customers are currently purchasing an annuity product, which offers just that. And 55% said that a predictable income was important to them for budgeting, yet the majority of people currently select a product where their income is dependent on investment returns.
I am not at all sure that people choose to have their retirement income dependent on investment returns. That’s what they get. Unless you are one of the 100,000 postal workers joining the Royal Mail CDC scheme in October, your pension income will be drawn down from an investment or bank account unless you press a button and swap pot for pension.
What CDC does, which is really radical these days , is to reduce the freedom to spend the pot as some kind of capital reservoir. Instead CDC savers have to “opt-out” of a wage for life pension.
If there is one thing that I want to see coming out of the impending review of workplace pensions is for savers having to repeat the CDC experience for all DC plans. People should be free to opt-in to pension freedoms but should not be required to purchase either pension or annuity. The workplace pension should offer every saver an annuity or scheme pension by right.
The only thing that someone should be required to do to get their pension is to provide the annuity or pension provider their bank details. The choice of annuity should be down to rate, if a workplace pension is prepared to offer a scheme pension , it should be the preferred option where the rate of scheme pension is higher than the annuity rate.
I appreciate I am talking technicalities here, but it’s important that we start considering “choice architecture” as a rate driven decision where the decision making is done by machine and not through impossible choices that most people do not feel up to taking.
I repeat again, the system of “money purchase” where people are required to choose to buy an annuity or pension over a cash or investment linked drawdown has never been shown to work.
Auto-enrolment has shown that nobody has to do anything ever again (including buying an annuity). But it has also shown that people can be coaxed into making good savings decisions by not taking any decision at all.
Repeating the dose at the other end of the savings journey looks both sensible and feasible.Although 80% of people say they are happy to be given a lifetime guaranteed income, only 10% buy one.
The Australian experience suggests that down -under people haven’t even got as far as working out what they want (so much for Common Purpose. David Orford is right to say Australians have a mountain to climb. But when they have climbed that mountain , they may find themselves no further than Brits are today.
Put the other way around, we are at an advantage of our Australian cousins because although only one in ten of us buys annuities, we know they’re what we really want. 4 in 5 of us want pensions/annuities and we don’t want to buy one – we want to get one.
For most of us , a pension plan or scheme is a plan or scheme that gets us a pension. Let’s keep it simple and let the Government do its stuff.
oh and it has to sound more exciting than that!
It really is largely about the language: annuity providers need to stop talking about selling products. Retirees don’t want to “buy” a “product” (some because they know they can’t take it back for a refund if they find it doesn’t work); but tell them “here’s how to get a pension” (or “to top up your state pension”) and they might be more interested in signing a contract which will guarantee them a steady income for the rest of their life. A pension is not a product.
Writing from a safari camp in Botswana the phrase “the elephant in the room” takes a more literal meaning! But, for what it’s worth, I have twice bought an annuity and, as part of a wider pensions portfolio, I consider them good value. If they turn out to be poor value I won’t be here to worry about it.
Asset-liability mis-matching risk increases the price of lifetime annuities that increase with inflation or don’t change in amount p.a. – costing about 2% to perhaps 3% per annum of assets – maybe – so investment-linked lifetime annuities provide more value BUT they have the added risk of greater fluctuation in income each year. Fluctuations can be up or down !!!!
Of course, we Australians are used to that, as our current retirement product of choice (well it’s the main one) is the Account Based Pension (ABP) draw-down product.
Investment-linked = Account Based Pensions + Longevity risk insurance
lifetime annuities.
Advisers can “add value” by timely switching from an investment option about to decrease in unit price to one about to increase in unit price.
An adviser might well double a retiree’s income over time. Must be a genius.