Annuities can often be terrible value

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Annuities can often be terrible value
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Those of us who have argued that annuities were appalling value have been regularly challenged by voices in the industry.

Many of them argued that annuities were in fact good value and offered vital security for pensioners throughout their retirement.

But the rules forced many to waste savings that could have been put to good use had it been paid as a lump sum.

I have been helping a reader who turned 60 in July 2011. He had a pension pot with Zurich worth just £913.32. Under the rules of the day, because he had other pensions worth more than £18,000 he was forced to take an annuity with this money.

He took his tax-free lump sum of £228.33 and shopped around. But, as you can imagine, no one wanted his piffling £684.99, so he was forced to take the annuity offered by Zurich. This paid £9.82 a year before tax annually in arrears. Do the sums and you will find the rate is 1.43 per cent.

The reader would have had to live to 130 just to get his money back.

The reader would have had to live to 130 just to get his money back

I have seen many poor annuity rates over the years but this one just about tops the lot. It may be many things, but good value is not one of them.

Of course this reader is just one of many thousands with small extra pots who will have felt similarly ripped off by the system.

Zurich for its part argues that “there are fixed charges for setting up an annuity as well as ongoing costs of administering an annuity which will have more impact on smaller funds.

“These charges are taken into account at the outset when calculating the annuity rate payable, and we made clear what was payable in the literature that Mr S received both before taking out the policy and upon taking out his policy.”

That is all very well if the investor has a choice, but this one, like many others, did not.

After I took up the case with Zurich they agreed, as a gesture of goodwill, and “in the spirit of the new regulations” to trivially commute the annuity into a one-off taxable payment.

That is fine. But how many other similar cases are lurking out there where investors are receiving a pittance every year because the rules forced them to squander their savings?

I would like to see every insurance company offer a similar amnesty to savers who are receiving less than 3 per cent because they were forced to annuitise a tiny pension pot.

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Calculated to deceive

The Sunday Times last week published a column by Louise Cooper, a financial analyst. Ms Cooper has a first class degree in business, finance and economics from City University. She was employed by Goldman Sachs to advise fund managers on their investments, worked as a business and financial journalist at the BBC for almost 10 years and spent three years studying to become a chartered financial analyst.

But her husband’s Friends Life with profits pension left her baffled.

She was bamboozled by the complexity of the charges and the structure of the investment which included our old friends ‘capital units’. Then there was an ‘extra fund injection’ involving an SRD, whatever that may be.

She concluded that the purpose of the language and the structure was to “deliberately rip off clients”. It is hard to argue with that.

If somebody as well-educated and steeped in the financial world as Ms Cooper cannot understand with profits statements, then ordinary investors do not have a hope in hell.

Investors were told with profits was about reducing risk and smoothing returns. But who needs that on a 25- to 30-year investment?

In reality it was about lining pockets and hiding charges. The only people now making decent profits from these investments are those who run them and those who sold them.

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Bonds in a bind

Nationwide, the biggest building society, has had the odd moan over the past few months about NS&I’s pensioner bonds.

It is difficult to know what impact the bonds are having. Nationwide merely says its “savings outflow has been in line with management’s expectation based on our share of the over 65 savings market segment”.

That segment may well have been rather high given that Nationwide at one time had a market-leading account that drew in £2bn within months of its launch.

However, its overall deposit growth continues to exceed its net lending.

So the bad times for savers will continue because while this is the case not even the competition from NS&I will persuade them to push up savings rates.