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.
Public confidence in workplace pensions has seriously deteriorated in recent years. Retirement savings rates are falling well short of the levels necessary to achieve an adequate post-retirement income and annuity rates have tumbled to create a perfect, potentially calamitous storm. Yet, neither government nor the industry has found the way to alleviate matters. And where are advisers?
Many traditional pension advisers have withdrawn from providing savings advice in the workplace, but it seems as though the mindset of policy makers still centres on employers driving pension decisions. Yet with the considerable upturn in personal pensions, Sipps and DC schemes the decision-making now falls to the individual, who is frequently, even with all the information to hand, ill-equipped to make the relevant decisions without professional guidance. Employers themselves have only limited resource to select, manage and monitor run auto-enrolment.
At a time when it is relatively easy to construct a portfolio of equity income stocks and corporate bonds to produce a reasonable income, the case for annuities is less than convincing. We need a retirement income plan, one that surpasses politics and short term point-scoring and effectively provides the public with the openness, clarity, simplicity and flexibility they are calling for. Perhaps this is the way to encourage more people to save.
Tony Vine-Lott is director general of Tax Incentivised Savings Association
