Even the average man in the street has been voting with his feet. Yet we persist with a system regarded by many as outdated, inflexible and often inappropriate. I am referring to annuities.
It would be wrong to blacken their name entirely. We can draw attention to annuities’ status as insurance against living too long, that is, ensuring that the money does not run out early.
We can refer to recent product development to enhance flexibility and some will even side with the Treasury’s understandable requirement for a secure retirement income in exchange for the receipt of tax relief on pension contributions. However, there is no escaping the fact that many no longer feel that annuities offer an appropriate solution for a retirement income.
Even the most biddable investors resent the low levels of current annuity rates, driven in part by low interest rates, but also improving longevity, the positive impact of healthcare and ever increasing capital adequacy requirements for annuity providers. There is also a marked reluctance to hand over money to an insurance company which “confiscates” the assets on death. Poor value and rigidity are just two of the criticisms levelled at annuities that have served to deter potential investors – and not just from investing in annuities. They seem to serve as a sheet anchor on pension saving as well.
In contrast, the combination of simplicity and flexibility has acted as the key catalyst for the tremendous success of Isas. Although Isa contributions are made out of after tax money, the straightforward tax-free status of the product itself is easy for people to understand. On the other hand, many have grown suspicious of the actual advantage of tax relief on pension contributions, seeing it as something of a mirage, as the tax is merely deferred.
The demographic statistics are clear. There will be increasing numbers of people entering into the retirement age bracket over the next few years. The low level of financial awareness among many of these baby boomers of their likely monetary needs means that they are going to have to make swift progress as they shift from the accumulation phase of retirement planning to the “de-accumulation” stage.
Certainly, I believe that there is an educational gap to be filled. There is a need to place much more emphasis in the future on the opportunities available to those who have reached this “de-accumulation” stage; also on those wanting to flatline – people who are semi-retired, on a lower income and neither adding to nor drawing from their savings or pensions. Greater guidance on how to invest the cash element of a pension for income would be a useful start.
For the ultra-low paid, the deduction by employers of auto-enrolment pension contributions may be the straw that breaks the camel’s back. Indeed, anecdotal evidence suggests that some may be pitched into the arms of payday lenders as they struggle to make ends meet. Once committed, their predicament is only likely to be exacerbated each month.