OpinionNov 21 2013

Annuities simply line pockets of insurance companies

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These issues can only become more important as more smaller companies offer pensions to their employees.

The main focus remains the annual charge cap which the government wants at 0.75 per cent and Which? wants at 0.5 per cent.

These seemingly innocuous charges can have a massive impact on a pension.

It is not just a question of saving £25 a year on a £10,000 pension, it is the compounded effects of the lost investment growth on that money that really hurts.

Yet the argument that lower charges could mean less choice is a powerful one.

But why has all the discussion been about investment charges rather than looking at what happens at retirement?

Why has all the discussion been about investment charges rather than looking at what happens at retirement?

It is almost as if the issue has been swept under the carpet or filed under ‘too difficult’.

As pensions commentator Ros Altmann said: “It seems the charges debate has lost sight of the wood for the trees.”

The wood in this case is an annuity charge which she puts at between 2 per cent and 3.5 per cent of the whole pension pot.

Low-cost pensions are all very well but that money is to fund the retirement of the investor and not to line the coffers of an insurance company.

Annuities remain one of the most opaque investments. We do not know for sure how much insurance companies make from an annuity sale because most will not tell us.

But the fact that they seem so wedded to them suggests they are making rather a lot.

The annuity market demonstrably does not work, therefore the costs must be capped to protect the consumer.

We currently have the ludicrous situation where an annuity bought directly from the supplier can be more expensive than one bought with financial advice.

That is very nice if you are a financial adviser but it makes no sense at all in market competition terms.

Skandia’s recent Adviser Insight survey revealed that more than two-thirds of 700 financial advisers questioned felt that the annuity system was failing consumers. Yet 400,000 people take one each year.

It is time the focus of the auto-enrolment debate was widened so we do not have to revisit the issue again a few years hence.

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Muppets wait in the wings

The recent consultation document on workplace pensions issued by the department for work and pensions touted defined ambition pensions based broadly on the Dutch model as a third way.

Once again our very able pensions minister Steve Webb appears to have listened and understood advice and is attempting to come up with a plan that could appeal in the real world.

This is a remarkable step forward from the last government which washed its hands of final salary schemes, except its own and those run in the public sector at the expense of taxpayers.

Nevertheless the idea of taking all indexation away from pensions is worrying, particularly as few people appear to understand the real impact of inflation.

Removing spousal benefits might seem a fitting step in the modern world. But this will inevitably have a much greater effect on women who tend to take more time off for caring, and who already have smaller pensions in general.

The problem is there is so much to do and so little time before Mr Webb faces the electorate and is potentially replaced by another stream of muppets.

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FCA cast as the villain

When I read that Informed Choice is to make a feature-length documentary on the financial challenges for the baby-boomer generation, my first reaction was to check my calendar.

Was it All Fool’s Day? No, it appears the firm is serious.

I am considering offering my own script for anyone wanting to fund a similar project.

The drama would start with a hard-pressed financial adviser penning an angry letter to the FSCS about the levy before heading off to the golf course.

Here our hero meets a potential new client who he then plies with a nice claret.

Over lunch he extols the virtues of investment bonds and a range of insurance which, he explains, will fit his client’s risk profile very nicely.

The relationship between client and adviser matures over many years and is near perfect when along comes a dodgy-looking geezer from an outfit called the FCA.

The villain brandishes his weapon, the feared RDR. “Tell your client what you’re charging or the game’s up,” he threatens.

An action scene follows with much chest banging, strutting and posturing.

But the world does not end and the client lives happily ever after.

Tony Hazell writes for the Daily Mail’s Money Mail Section. He can be contacted at t.hazell@gmail.com