This morning is the first work morning of 2025. Good luck on your wake up! I am not quite ready for work but am easing myself back with my blog which people seem to be enjoying.
Some are finding my thoughts contentious and one (Byron) wants more debate. The question is fundamental. I am arguing that pensions and annuities are different things. People like pensions but don’t like annuities. Legal & General have got under my skin by calling their annuities “pension annuities”.
Philip Geddes has made some pertinent remarks in support of L&G’s position and they are published on linked in
Now I think that most people would agree with Philip Geddes that an annuity is a guaranteed series of payments and that a “pension annuity” suggests that the annuity is a kind of pension as it pays out for as long as you are around, or indeed you and your partner- depending on what you choose to buy.
So why do people like pensions and why do they dislike ” annuities” and why do I dislike annuities taking over pensions by the use of “pension annuities”. Here is what Byron says in the comments on this blog
Philip Geddes over on the LinkedIn version of this blog says “Having something that looks and feels like a DB pension but has investment upside with no downside seems wishful thinking.”
Philip’s background as a professional in tax before his own retirement may make him
biased to say exactly what he’s written there.I think you may instead be desiring “something that looks and feels more like a DB pension, but is a pot of savings which may yet have investment upside, although there may be downside too”.
The value of a member’s pension in DB is usually effectively halved on death, and state pension for widows or widowers is similar at best.
Keeping your pensions saving in, for one example, a SIPP, on the other hand, means you could still have some investment upside but also have to live with downsides.
But you can draw down as and when you require, more often in lumps perhaps, rather than by regular monthly instalments?
After death, what’s left in a SIPP is now to be taxed before being redistributed. But unless all of the investment fails that’s still more than zero in a DB or state pension after both member and partner dies.
Life’s expenditures are a mixture of regular monthly (eg day-to-day living expenses) and lumps (cruises, weddings, parties generally, replacement assets, etc.)
Some of us may be confident, yet realistic, enough to ride the bumps of the roller coaster using draw down, while others require the certainty (but the lower value in the hand) of an assured solution.
Which is it to be, Henry? You decide.
Thanks for letting me decide, I think that offer came from Byron but it is a hugely important decision in people’s lives if they have a DC pot. People are sold a pension and a pension is what they expect. Those with pension pots can’t (generally) transfer their “pension pot into a pension fund” and get a pension.
You can in certain circumstances buy pension from the Local Authority with cash from a pot.
Most people have money as savings that they can draw on to meet the big bills (mentioned above). Most of us have a private pot or entitlement that we can exchange for a tax free cash sum which adds to the bank of money we draw on to pay the unusual bills. It is roughly a quarter of the value of the pension that can be drawn and usually 25% of the pot value that can be exchanged.
This money drawn is never referred to as a pension, it is the money that people have taken instead of a pension. Many people choose to draw more than a quarter of their “pot” and pay tax on the taxable part, some choose to mimic a pension by setting a drawdown rate they consider right for them.
They are either “confident” or mimicking others or simply drawing what they need and hope for the best. There is very little information on why people select a drawdown rate or a cash-out strategy where they’d rather have their money elsewhere than a pension pot.
What I think happens is that we assume what we do is what others do, most of us mimic what others do , some are confident to do what we think makes sense but we do not buy a pension, (and only about one in ten buy an annuity).
We do not however complain about the state pension that comes our way set by the Treasury who determine the increase year by year and along with the DWP determine when we start drawing out pension. The WASPI issue wasn’t about the pension rate but about explanation of what was going to happen to the women’s pensions who were born in the 1950s.
My point is that we are happy to have others decide the amount the state pension is and trust Steve Webb and team when we moved to a new state pension system in 2016. We trusted the state with pensions and by and large we accept the pensions we get from our companies. The two disputes between companies and members of their DB pension plans is about the unfairness of pre 1997 pension entitlements which sometimes aren’t increased (when they could) and the non-distribution of pension surpluses (famous examples being BP and Shell though many more DB plans could choose to provide more inflation increases.
This is what I mean by “upside”. State Pensions can increase in line with retail prices, earnings increases or a guaranteed minimum – this is the triple lock and means there is upside for all with a state pension. Many DB schemes have the capacity to pay out more than the amount they promise (they aren’t allowed to use the word “guaranteed” which has been bagged by insurers).
Most of us feel our state and DB pension is part of a deal with the employer and/or the state. The annuity is a break with the relationship. Of course there is downside in having a pension which is paid from a fund created and maintained by an employer but there are opportunities to interact with the pension by becoming a trustee, reading the trustee’s acco0unt for the year and studying how things are going. Many employers want to be rid of all this and pay a premium to get the pension swapped for an annuity.
You ask what I want for my DC pension pot and for my DB pension which I get from a very good former employer. The answer is simple- I want a pension and not an annuity and I don’t want confusion with the phrase “pension annuity” which is being promoted to me by my personal pension plan provider – L&G.
I hope this makes it clear why I want to make it possible for me and others to join a pension plan with a degree of upside (one-off distributions) and very limited downside for pensioners (the Pension Protection Fund). We aren’t there yet but that is 2025’s job, the job of the Pension SuperHaven pension fund.
I don’t know, but I think there are – many others like me. I’m hoping that we can return pension savings to pension payments.
