The number of people still in drawdown at age 75 has historically been fairly low. Before the pension freedoms the majority of retirees bought an annuity. And few of those who did choose drawdown encountered any issues with the lifetime allowance given the sizeable lifetime allowances we have seen over the last decade, and the...
The retirement market has changed substantially over the last 18 months since the pension freedom changes. More money is now going into drawdown than annuities, rates have been hit by Solvency II and lower gilt yields, and we have seen several providers pull out of the annuity market. So does this spell the beginning of...
For those in or reaching retirement, deciding what to do and when to do it isn’t easy. Pension freedoms offers fantastic choice and flexibility, but it also increases the number of options and choices people need to consider. Add in the uncertainty of how long they will live, whether they will need long-term care, the...
Sometimes I think pensions are the Pringles of the financial world. Now the lid has been popped open (by pensions simplification and all that) the politicians just can’t let them alone. As you know, once you pop, you just can’t stop.
The next 12 months is shaping up to be yet another busy year for pension legislation and regulation. Here are my top five changes to look out for:
Whilst the rest of us were enjoying our Turkey Dinner, Steve Webb, the Pensions Minister, spent his Christmas thinking about, um, well, pensions. Specifically, following the Treasury’s move to give people from next April the ability to use their pension funds how they see fit, Webb is keen to explore what can be done to help the five million people who already are receiving an income stream from a money purchase annuity.
And all that musing led to a new initiative. To let those who already have an annuity sell it on. Trade it in second hand. The prospective buyer will pay the annuitant a lump sum, and in exchange will receive each annuity payment until the annuitant dies.
The FCA’s report into annuity sales by providers makes for yet another indictment of the culture of our industry.
Despite the warnings issued in the previous review back in 2008, it appears that some insurers have half heartedly implemented the ABI Code and then sought to ensure that their profits are supported by selling as many annuities as possible to existing pension savers.
Why is it so hard to change?
The Chancellor’s bombshell on pensions reform has cast a long shadow over the future for annuities. Billions of pounds have been wiped off the value of life assures, with specialist annuity providers particularly badly hit.
But are annuities really dead? The changes announced by the Chancellor, whilst radical, may not actually change the position for many pensioners.
Most people reaching retirement age are risk averse. Although they may be attracted by the idea of withdrawing their pensions savings, the truth is that many will simply look to secure the best level of income from their savings. This will still mean that an annuity will still be the right choice for them and if they shop around using the new “right to guidance”, then they will get a better deal and there will be more competition between providers.
When I joined the life insurance world over 30 years ago, I was struck by the complete lack of transparency which surrounded the costs and margins of With Profits policies. At that time, life offices were moving strongly into unit linked and the contrast with the older products was very stark.
Over the years, I have come to understand the complexity of the actuarial processes which underpin with profits funds and annuities. In fact, it may well be time for Hogwarts to offer extra classes in financial spells and wizardry to lift the effect of the Befuddlement Draft which descends upon me whenever I think about the pricing of annuities.
The basic premise is simple. Premium multiplied by investment return multiplied by mortality equals return. So why is something so simple not delivering the right result for investors?
The focus of much comment on annuities is what poor value they represent and the profit margins of providers. As with much comment on the subject, it is important to get into the detail for a truer picture.
- Gilt yields have, until recently, been falling for a long period
- Life expectancy has been increasing, thus increasing the period over which an annuity has to pay out
- A high proportion of people still don’t shop around and remain with their existing provider
- Many of them don’t obtain the enhancements to which they are entitled
The FTSE100 is a remarkably unreliable friend. It has inconsistently changed its complexion faster than many ladies of dubious professional standing. Over the decades it has become the focus of the fashionable companies to invest in of the period, and we see them rise with enthusiasm and fall into financial disgrace on a regular and almost cyclical basis.
Thus we have gone from the old imperial trading companies like British & Commonwealth and ICI, through the conglomerates of BTR, Hanson and Williams. Then many will recall the early privatisations, then the demutualisations and the especially frenetic TMT (Technology, Media & Telecom) boom that bust so spectacularly at the end of the century. Even after that the fashion fads continued with, as I am sure we can all remember, the finance sector with banks that were surely “too big to fail” and then, running parallel with them, the rise of the miners during the commodities super cycle.