Weapons up minister’s sleeve in annuity battle

So why is pensions minister Steve Webb so keen on them?

My suspicion is that he is heartily sick of the whole annuity business and is looking for something – in fact anything – which can offer better value while saving and in retirement.

The obvious advantage is that costs could be lower in pooled, no-thrills funds run by actuaries.

I would be the first to point out that actuaries do not have a great record of running with profits-style funds.

But with profits’ failures were primarily down to over-marketing, bad selling, poor oversight and inadequate regulation.

Crazy terminal bonuses declared by firms who needed to be at or close to the top of performance tables followed by a cliff-edge drop in new business proved their undoing.

There is no reason why these failures should be repeated by a CDC scheme.

But CDC lacks one key element most pensioners desire above all else – certainty of their retirement income. The Dutch scheme has not delivered this and it is difficult to see how a UK scheme could.

CDC lacks one key element most pensioners desire above all else – certainty of their retirement income

But Mr Webb could have other weapons up his sleeve in the battle to improve on the annuity.

I suspect we saw a potential hint of his thinking in the decision to allow, for a limited time, top-ups to the state pension through a class 3a contribution.

The reported rate of £1 a week index-linked income for a £900 contribution cannot be matched in the private sector. A similar income from an annuity would cost £1468 says Tom McPhail of Hargreaves Lansdown.

So what if the government were to take this a step further and offer to take on annuity business up to a maximum amount?

It would be an excellent way to raise money and give pensioners retirement security from the money in their pension pot – and it would be a great idea to take into the next election.

Sometime this month the FCA will publish its review of the annuity market. If this shows a dysfunctional market, as I suspect it will, then Mr Webb’s hand will be strengthened further.

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Dim view on sales push

Panic buying is rarely a good idea – and neither is panic selling. Throughout 2012 some advisers and commentators were sending out shrill warnings suggesting men buy their annuity before single pricing.

Some suggested that the EU gender directive would send rates for men plummeting by as much as 13 per cent. The more sensible suggested a drop of closer to 2.5 per cent.

Now the market has settled, MGM Advantage’s annuity index suggests rates rose 13 per cent in the year to December 2013.

Let us not forget also that the FTSE 100 rose by 13 per cent in 2013.

In many cases those who bought in the second half of 2012 made a once in a lifetime purchase that has condemned them to living on less income than they might have received.

Let us put some figures on this. In July 2012 a level joint life policy for a man aged 65 and woman aged 60 was paying a tad more than £5,000 according to Better Retirement Group.

Today a joint life annuity for a 65 and 60 year old would pay around 10 per cent more, Moneyfacts figures show.

Add the stock market growth and a couple retiring today would get around £1200 a year more level income than if they retired 18 months ago – and that is without accounting for them being a year older.

Give them a 20-year lifespan and they could miss out on at least £24,000.

The sort of ‘buy while stocks last’ selling that was behind the annuity push has no place in financial planning – though it would earn praise from a double-glazing salesman.

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Missing out after opt-out

Continuing on the pensions theme, some Prudential-sponsored research has suggested that employees who opt out of workplace pensions should be given regular statements to show what their pot would have been worth had they stayed in.

The research was published with the Strategic Society Centre think tank and the Institute for Social and Economic Research.

It is an interesting idea that might persuade people to opt back in when they see what they are missing in terms of free money from employers and tax relief.

On the other hand a stock market crash might leave some feeling they are better off with the money in their pockets.