Personal Pension  

Less nudging, more shoving

Less nudging, more shoving

In 2010 I proposed the abolition of the requirement to annuitise, provided that both the state and the individual were protected from downside risks. The former comes into effect in April 2015, but the latter would appear to have been forgotten. This is unfortunate.

Several recent surveys have asked people about their intentions for their defined contribution retirement savings. The recent Aon DC Member Survey found that nearly 70 per cent expressed a desire for a “steady, secure income” in retirement, without the risk of outliving their savings – that is, a lifetime annuity, although it is rarely described as such.

A report from the International Longevity Centre-UK think-tank found that the majority of DC pot holders aged over 55 want a guaranteed income for life, particularly an income protected against inflation. It also found that only 50 per cent of people understood how to obtain this from their pots: the word ‘annuity’ does not resonate.

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Abroad, there is a growing disenchantment in some developed countries – notably Australia and New Zealand – with their lack of an annuitisation culture. Fortunately for the UK, these countries have been running control experiments on our behalf, albeit unwittingly: we have much to learn from them.

It would appear that most people do not appreciate that an annuity is a pension. In addition, when it comes to insuring against longevity risk (the risk of outliving our assets), there is no directly comparable product. This, combined with the rapacious behaviour of some within the financial services industry, is an open invitation for today’s situation concerning annuities: market failure. But this does not mean that annuities per se are the issue.

The politically astute 2014 Budget sent a shock wave through the retirement savings industry. By ending the obligation to annuitise pension pots, it sowed concerns that the socialisation of longevity risk, in particular, may not have a future. Annuity providers suffered accordingly, accompanied by growing concerns that many individuals will ultimately also suffer.

The Pension Wise guidance service is intended to mitigate such concerns, but there is a risk that it will disappoint. It is not intended to deliver what people want, which is advice as to which specific transactions to execute, and with whom.

Indeed, the distinctions between ‘guidance’ and ‘advice’ are very hard to grasp; they are certainly not intuitive. Even if a definition could be agreed upon, it is likely to be so nuanced as to be nigh impossible to communicate simply.

The confusion is reinforced by the existence of the word ‘advice’ in the name of each of Citizens Advice Direct and The Pensions Advisory Service, and the much-derided Money Advice Service, none of which can give ‘advice’ as it is understood by the industry.

Consequently, after an initial guidance contact with CAD or Tpas, many people are likely to wallow in decumulation indecision. Some will take lump sums, which invites the risk of running out of money before death (perhaps to fall back on the state), and others will succumb to fraudsters.