Like rewarding a dieting effort with a deep-fried pizza, buying an annuity without advice or care is a tragic waste of a lot of good work.
Think how much attention we pay – or should pay – to saving for retirement. If you’ve been diligent you’ll have put money aside for 30 or 40 years by the time you retire. You’ll have sacrificed large chunks of your salary so it could go into your work pension and maybe saved monthly into a personal pension or other savings and investments.
Having done that and reached retirement with your hard-earned nest egg, why would you not try to get the best possible deal for that money?
The sad fact is that, faced with what may be the biggest financial decision they’ll ever make – and one that cannot be reversed, most retirees blow it. It’s often through no fault of their own. Rather they’ll be let down badly by pension providers, steered into accepting a mediocre income when they could have something far better.
Put bluntly, what’s called the “at-retirement” market doesn’t work, at least not for savers. Yet there’s a lot of money in it: – the annuity market was worth some £12bn last year, according to the Association of British Insurers.
That figure helps explain why Tesco is getting in on the act. This week’s revelation that the supermarket giant plans to launch an annuity comparison service made headlines for both good and not so good reasons.
On the plus side, its presence will raise awareness of the need to shop around for an annuity. Far too many people settle for the income offered by their existing pension provider, a mistake that can cost thousands of pounds in retirement.
But shopping around for the best rate is one thing; picking the right type of annuity is another.
Financial advisers reckon the best option for the majority is an annuity that rises in line with inflation. However, this starts with a lower income than a level annuity, so the majority go for the latter.
That’s because they don’t take advice, either because they’re unwilling or unable to. Yet just one in six pension scheme members feel confident and able to make an informed decision without advice, according to research last year by the National Association of Pension Funds.
Within a day of the Tesco announcement came a report underlining exactly why the purchase of a pension income at retirement is a decision like no other. A 65-year-old man retiring today and using his lifetime pension savings to buy an annuity will need more than £152,000 just to secure an annual income in retirement of £5,000 a year, the Office for National Statistics (ONS) revealed. Just four years ago he would have needed “only” £118,000.
That increase – due largely to the impact of quantitative easing on annuity rates – puts the current level of savings into perspective. The average private pension pot where the main earner is between 50 and 64 is £135,200, enough for a pension income of little more than £4,400, said Hargreaves Lansdown.
So the risk of failing to shop around and buy the right type of annuity is greater than ever. This may all seem quite abstract. For those who saved all their lives only to be faced with destitution in their final years, it’s anything but.
OF ALL the known unknowns around the ramifications of Scottish independence, as Donald Rumsfeld might have put it, what happens to our pensions is right up there in terms of uncertainty.
A report published yesterday by the Institute of Chartered Accountants Scotland (Icas) belatedly pushed some of the main issues into the spotlight. It highlighted in particular the threat posed by EU solvency rules that would require pension liabilities to be fully-funded “at all times”.
However, the report’s real value is in raising questions that have so far been swerved.
Look at the decisions to be taken around state pensions alone. Most obviously, how do we pay for them? In the short-term there’s the question of whether Scotland would adopt the state pension increase timetable and the single tier pension set out by the UK government.
The Icas report sparked fresh debate over whether, in pension terms, Scotland would be better or worse off under independence.
But forget about comparing Scotland’s pension liabilities with those of the UK. There’s a storm brewing whichever way you look at it.
Successive UK governments have shied away from tackling the problems posed by an ageing population, despite recent progress. The long-term thinking required in pensions policy conflicts too much with short-term political horizons.
So as far as pensions are concerned, an independent Scotland could do far worse than to start by setting up an independent body that takes the big decisions away from politicians.