Want guaranteed income for life, that’s an annuity

Hundreds of law changes have made pensions almost incomprehensible. Picture: Getty
Hundreds of law changes have made pensions almost incomprehensible. Picture: Getty
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IT’S only five months since a UK government rule change allowed those 55 and over to dip into their pension pots without limit, rather than having to buy “straitjacket” annuities. Pensions “freedom” they called it, and it won plenty of approval. But not from me.

I’ve seen too many horror stories from the previous freedoms of 1988 and the early 1990s, when pensions drawdown was invented by Equitable Life. Even the cleverest among us are clueless when it comes to pensions. It’s mumbo jumbo land. I’ve sat in boardrooms with some of the brightest folks on the planet and watched them lose the will to live while listening to pension experts speaking in algebra.

Governments haven’t helped. There have been hundreds of pension law changes since 1987, making this whole area a dog’s dinner. There were 74 rule changes between 1987 and 2000. The following six years saw another 315. That was before “Pensions Simplification” took effect in April 2006. Simplification? We’ve had another 200 changes since then.

So is drawdown, rather than a nasty annuity, the answer in how to face up to the latest big change? Let’s see what history tells us. Annuity plans bought over the last 20 years have proved disastrous. Early buyers bet on annuity rates rising, but they’ve kept falling.

If you look back to 1850 you’ll see that the norm for annuity rates is slightly higher than now. Only slightly. The anomaly of much higher rates in the 1970s and 1980s was caused by the baby boom of 1946 to 1963. Can’t see another one on the horizon, can you? So what now?

A majority of would-be retirees don’t want an annuity, according to research last year, but the same majority wanted an income from their pension pot that would be guaranteed to last as long as they or their partner did. Erm, that’s an annuity.

Using drawdown to get higher income involves higher charges, no guarantees, exposure to stock markets and needs constant expert assistance. Watch what happens when you take income and charges out of drawdown when stock markets fall. Disastrous.

And it gets worse. We’re living longer. At least half of females aged 55 now will live beyond 85. That’s 30 years relying on a non-guaranteed plan to deliver higher income. Unless you have truly expert help I’d say this is 10-foot bargepole country.

And if this wasn’t all bad enough, while the government didn’t think it through properly – unless, of course, they reckoned on more taxes from those daft enough to exceed their tax-free cash chunk (not far wrong there, as it turns out) – the crooks got it straight away. Scammers are out in force doing their best in this rich-pickings environment to separate you from your hard-earned pension savings. They promote unregulated plans sold to the unwary and those anxious to improve their income payouts. As www.pension-scams.com puts it, “a lifetime’s savings lost in a moment”. We know of someone who lost his £360,000 pension pot after transferring it to “invest” in parking spaces in the Sahara.

So what should you do in this velcro environment (rip-offs left, right and centre)? Be very, very careful, is the simple answer.

Take sound counsel from regulated independent advisers who have experience and who don’t speak in jargon. Do not talk to anybody who cold-calls you, and watch the charges and the small print (remember, the large print giveth and the small print taketh away).

Finally, check what valuable pension-related opportunities are going to disappear next April, when new allowances come in, and act on them. The biggest single regret that I come across is from those who didn’t pay enough attention to saving until it was too late.

Alan Steel is chairman of Alan Steel Asset Management