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Billy Burrows: Sensationalist media is harming pension savers

You can hardly turn on the TV or pick up a paper without being bombarded with stories about the woes of the annuity market.

Last week, there was a lot of coverage about the effect of quantitative easing on annuity rates pointing out that annuities were at an all-time low and pensioners are paying the price for the banking crises and the European debt crisis. The other big news story was the report from the NAPF with the headline ‘Savers left short-changed and bewildered by unfair annuities system’ which culminated in the sensational headline in Monday’s Daily Express, Pensions slashed in £3bn ’rip-off’.

As a seasoned observer of the annuity market I am always interested in what is fact and what is fiction. Where I see articles that unfairly put the boot into annuities using incorrect facts and information I am left wondering who is going to stand up for annuities?

It is a fact that annuity rates are at an all-time low but that is not the fault of annuities, it is the fault of low yields on gilts and corporate bonds. However it is simply wrong to say that the annuity is a ‘Rip off’ or as another headline put it, ‘annuity market is facing collapse’.

I know no other market that constantly refuses to stand up for itself against spurious allegations. Look at the banking industry, it takes a brave person to stand up for obscene banker’s bonuses but the spokesperson for the banking industry in the UK does exactly that.

In the absence of any defence from the annuity companies that sell over £11bn of annuities it is left to me to stand up for annuities.  I have no particular affection for insurance companies and have been quoted in the past as saying ‘insurance companies are ripping off their clients’, but I have a strong desire to help individuals get better outcomes with their hard earned pension funds. I fear that this negative publicity, especially coming from a respected body as the NAPF will only result in more people becoming disillusioned with pensions at a time when the industry should be trying to achieve the exact opposite, i.e. encouraging individuals to engage with pensions and make better decisions.

My defence starts with pointing out how much progress has been made in answering the historic criticisms of the annuity market. The first criticism; that it was compulsory to buy an annuity was answered by removing the compulsion to buy annuities at age 75. Three cheers for that.

Another criticism that annuities were poor value has been largely overcome by re-distributing income in favour of those living in poorer regions of the country through the introduction of postcode annuities. The rapid growth in enhanced and life style annuities has also increased the income for many annuitants with below average life expectancy.

Let’s not forget the sterling work done to promote the increase take up of the open market option. I take my hat off to Pension Income Choice Association, especially its chairman for his tireless campaign to put the issue on the political map.

What about the move by some companies who have poor annuity rates to quote annuities from higher paying companies in their vesting packs? Look at the actions of the large company schemes that appoint annuity brokers for their members thereby increasing the annuity income their members get.

The annuity market is far from perfect but it has made huge progress over the last 20 years and deserves credit for this.

I do not have a problem with the media exposing bad practice, injustice or attempts by the industry to short change customers but I do object to sensational and false accusations that undermines much of the good work in making annuities better value for customers.

Billy Burrows is director of Better Retirement


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. A fairly worded synopsis. Products do come into and out of the market as the features of them are favoured or otherwise. Let us not forget that the original deferral of annuity purchase, available in SSAS’s from more years ago than I care to remember was to allow a timely exit from investments and entry into the annuity market at an appropriate time. This is what income drawdown now permits. Holding of assets until more favourable annuity rates might be available. Having said that, it might be a while….

  2. It`s what the media does Billy, get over it. Next time Beckham changes his haircut it will all be forgotten.

  3. With all the bad publicity surrounding saving for retirement which has bombarded us over recent years it is a wonder anybody bothers at all. We need positive headlines for a change. Any newspaper have the guts to publish these ? No, the British press only likes bad news. News of the World down, Daily Mail and Express to go 🙂 then perhaps people will read news, not tittle tattle.

  4. Of what value is the removal of compulsory annuitisation when all the alternatives are governed by GAD Rates and when the government’s punitive 55% death tax (1.375 x the current rate of IHT, with no NRB) on unspent funds remains? Virtually nothing, I suggest.

    The best current OMO annuity rate for a male age 65 with a 50% widow’s pension is now barely 6% and pensions are assessable for tax as earned income. The alternative of tax free withdrawals of say 5% p.a. from an ISA portfolio (or nett of basic rate tax deemed paid from a Unit Trust portfolio) would be better, with reasonable prospects for some inflation proofing over the medium to long term, a 100% widow’s pension AND you’d still hold all the capital with no 55% death tax.

    For a basic rate tax payer with no employer input, it’s very hard to justify a recommendation to put money into a PP.

    Things MAY get better in the future, if and when gilt yields improve, but set against this are the impacts of Solvency II and steadily increasing longevity.

    The government ought to be allowing the industry to design and market non-GAD rate-governed retirement income products but refuses stubbornly even to acknowledge such proposals. The only reason for this that I can imagine is that overnight the annuity market would wither and die, resulting in a dramatic decline in demand for gilts. Would this really seriously destabilise the government’s finances? Maybe, I don’t know. But, at a time when people’s expectations of a decent level of retirement income are being routinely dashed on the rocks of dire annuity rates, it seems a dreadful shame that the legitimate needs and demands of people who’ve saved diligently for many years are being ignored because of political considerations, not least because more income would result directly in more income tax being paid and more money being spent across the wider economy.

  5. Julian talks about non-GAD rate-governed retirement income products – he should look at the work being in the US about what is a sustainable drawdown amount – it is about 4% well before max GAD

    The point is that to make more max GAD is to probably take more income than is sensible without depleting the fund

  6. I know people do consider the 55% death tax punitive, but is it?
    A large portion of people who are likely to use DrawDown would have sufficient free estate to be near or above the trigger points for IHT. If the pension fund were in anything else it would thus suffer tax at 40%. This leaves 15% as a balance to the tax benefits when investing, and the internal tax breaks. 55% is I would argue a very decent compromise.
    On a straightforward net of income tax analysis there is little to choose between an ISA and a pension, so long as the pension contribution does not exceed the ISA max, which would cover most people. The withdrawal from an ISA is more flexible, but this needs to be balanced on a psychological level by being too accessible. Of course the residual fund is potentially accessible to IHT, so Julian’s comment is a little on the flamboyant side.
    Alternatively the ISA money could be used to purchase a Lifetime annuity, part of which is not taxed, being a return of capital. This would allow for security of a level of income throughout one’s life. Whether this would be preferable to withdrawal from an ISA could only be determined by calculation, and the hope of long life.
    In general interest rates now have a relatively small effect on the amount paid on an annuity relative to the effect of longevity. This matter appears to be a matter of some concern to the current Government who are taking drastic action on the matter. By instigating the 3,060th re-organisation of the NHS since the turn of the century they are ensuring that doctors are so busy on management that they will have little time for actual medicine, which will have the desired effect of reducing the longevity figures dramatically. Pensions in payment will rise, thus removing a whole phalanx of dependents from the State support, allowing a reduction in tax and turning us once again into a green and pleasant land.
    Unless someone has a better story to tell there is no chance of annuities materially improving in yield, in other words stop complaining about annuity companies – just drop dead quicker.

  7. A fair point made there. The recent press attacks have caused a lot of panic and negativity around retirement especially annuities and has left the affected person in a confused state of mind. In my view rather than solely being focused (most of the time precious) on the specifics (products/regulations) – it is high time the relevant annuity bodies engage with wider group (including media) to create overall awareness about the retirement options a layman has – given all the positive changes in the annuities market – something which is certainly under our control as oppose to QE and its subsequent effects.

  8. Good article.

    Media reaction is perhaps understandable – there is a large (and growing) tranche of people retiring now who have seen the value of their pensions drop with the market, and the buying power of the fund that’s left drop with the effects of Quantative Easing.

    What WOULD be good is if a consumer body challenged the government to justify the benefits of the QE programme against the ongoing effects on people’s retirement incomes.

    As Julian pointed out – with Solvency II around the corner, Test Achats due to implement in December, and the ongoing strengthening in mortality not looking like slowing down, the chances of “deferral” being the right answer are slim to none.

    Good article, Billy – and good debate.

  9. To BB ~ The Retirement Income Bond (note the deliberate avoidance of the now almost dirty word pension) I have in mind would be geared specifically to utilise the entire fund over the (underwritten) remaining lifetime of the annuitant (and/or his younger spouse), allowing for a prudent rate of investment growth, with an insured element against early fund burn-out. Given that the insurance element wouldn’t be called upon unitl many years in the future, if ever, I don’t see why it should be very expensive, notwithstanding the imposition of Solvency II.

    The rate of income drawdown could be reassessed periodically to see if better than expected investment performance or a deterioration in the health and thus life expectancy of the Bond holder/s might facilitate an increase. Simple stuff, I would have thought.

    If a large and financially strong provider is unable to offer a product based on a realistic long term growth expectation of just, say, 5% p.a. then it really shouldn’t be in the retirement income business.

    Some time ago I did a calculation using a capital drawdown programme I happen to have on my PC and, assuming a life expectancy of 25 years (from age 65), came up with an income of about 7% (with a 100% widow’s income).

    What is needed is thinking outside of the box, Billy. Sustainability of capital doesn’t come into it.

  10. David Trenner - Intelligent Pensions 15th February 2012 at 8:46 am

    You have to ask if the NAPF were not a bit naive in their press release.

    Trustees of DC schemes have to take steps to ensure that their members get proper advice and that all use the OMO. Telling the press that leaving your pension with ABC ltd will give them 15% less income is rather inviting the like of the Mail and the Express to scream rip-off!

    Then again, if you can get £1,000 p.a. from Aviva or Canada Life how do you explain to people that the likes of Axa and the Widows only offering £850 is not a rip-off??

  11. Its another example of media not sensationalising pensions but demoralising the public.

    You constantly hear and read negative headlines about pensions.

    Yet pensions are brilliant.
    Don’t believe me?

    Next time when you are looking at OMO, ask the ceding company to provide you with total client contributions in to the plan.

    I will bet you that in at least 7/10 you will find that the client contributions equates to at least the tax free lump sum (oops PCLS) or more !!

    The resulting annuity is free money.

  12. Julian, I’d be curious to see your financial assumptions if you think you can deliver 7% over 25 years.

    What element of risk hedging are you taking for longevity, reinvestment risk, credit defaults, cost of underwriting? Who would provide the financial backing, and what returns would they expect for their backing?

    If by “some time ago” you mean 5-10 years – fine. But any time since quantative easing, with low interest rates on long bonds? I doubt it.

    Unless you took a “with-profits” approach to smooth the good years against the bad… 😉

  13. Oops, sorry ~ allowing for a deduction at outset of 4% to cover the insurance against the bond holder outliving his expected remaining lifespan and an assumed investment growth rate of 5% p.a., the figure comes out at 5.6%, not 7%. My memory mis-served me.

    Raise the growth rate to 6% p.a. and the income rate become 6.18%.

    As for risk hedging, reinvestment risk and credit defaults, I’m not taking any of those things into account, I’m not an actuary. It’s just an idea that might fly if there’s a provider out there that considers it can deliver from a suitably low to modest risk portfolio (Gilts, Bonds, a bit of high div Blue Chip stock, the usual stuff) over 25 years a return of 5 or 6% p.a. with a better than annuity level of income before it totally burns out.

    The reason I don’t think the insurance element should cost much is because, provided the actuaries have done their sums properly, the likelihood of it being called on less than 25 years hence should be slim.

    By the law of averages, a proportion of Bond holders won’t live their full life expectancy, some will live almost exactly the number of years estimated and a few will live longer ~ but, over 25 years or more, one might reasonably hope for/ expect the portfolio to have outperformed its cautious benchmark rate of 5 or 6%. In all those scenarios, the insurance wouldn’t be called upon.

    I dunno ~ maybe an actuary would shoot the whole concept to pieces and I’d have to hold up my hands and say Okay, it was just an idea, you know better than I do.

    My frustration is that nobody’s even talking about it as a possible alternative to the cursed annuity trap that’s putting more and more people off the idea of going anywhere near a DC pension plan.

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