PensionsJul 28 2014

A risky proposal

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The announcement by the chancellor on Monday, fine-tuning his radical Budget pensions overhaul, remains one of the most interesting developments in the decade-long debate the nation has been having about retirement provisions. But, as exciting as it is, there is still something that is still not right. Many pensions’ experts have long been saying that annuities’ contracts were inherently unfair to annuitants.

They have pointed out that the actuarial assumptions underlying annuities, in particular the longevity assumptions, gave insurance companies an unfair advantage in that they assume that annuitants will live far longer than most of them will ever do.

If living to one’s mid 80s for males, and late 80s for females were fair assumptions, most annuity contracts often assumed a lifetime in to the 90s, on which they based the annuitants’ incomes.

Most reasonable people will agree that the idea of smoothing is that at that late stage in one’s life, what the insurance companies lose on having a client that lives far beyond his or her life expectancy, they gain on the roundabout when the person dies years earlier than expected.

What was blatantly unfair was when within weeks or months a relatively young annuitant, aged 75, dies prematurely and his or her entire annuity goes in to the insurance company’s coffers. A simple remedy would be to introduce legislation returning some or most of that money to the estate of the deceased.

Although returning control of a pension pot to the saver is right and proper in an age when individuals should have greater say over their savings, the dark cloud of late-life dependence on the state still hovers over head. The risk is simply that some pensioners, maybe a small minority, may waste what remains of their pensions savings, after the taxman has taken his share.

However, what the chancellor has proposed is far more radical – and risky. Having a generation of babyboomers retiring with a sizeable amount of money, more than most have ever handled as a lump sum, carries all the temptations we have seen with some lottery winners. We need to put in place proper provisions to meet this eventuality, over and above so-called independent guidance.