When I reflect on the current state of the retirement income industry, I can’t help but be reminded of the film The Matrix, in which the hero, Neo, is offered the choice of the red pill that opens his eyes to the facts of his environment, or the blue pill where he can continue to live in ignorance.
Sadly, retirees today continue to be served the blue pill, and the current ABI initiative falls far short of changing this as it continues to steer young, healthy retirees towards a lifetime annuity without a meaningful reference to the alternatives.
I suppose we shouldn’t be surprised that the lifetime annuity remains the mainstay of the retirement income market in the UK. It is after all the only product that guarantees an income for the rest of the retiree’s life.
In the era of final salary schemes, a lifetime annuity provided the continuation of a salary-related benefit into retirement, and delivered a promise made to the employee while they were still working.
It also acted as an insurance product, as benefits would continue to be paid no matter how long you lived, even although that was unlikely to be for long.
Fast forward to 2014, and the world has changed (think how far telecommunications have come in that time). Annuity rates have plummeted, and yet here we are, still leaning on the lifetime annuity to support our ever-increasing, longer-living, retired population.
Indeed, over 90 per cent of retirees buy a lifetime annuity, presumably on the premise of its lifetime guarantees, but without really understanding what it is they are trading in order to get those guarantees.
In this day and age, people should be given the opportunity to test-drive their retirement before locking themselves into a product that has to serve their financial needs for 20 years or more. People talk about inertia, but I think people panic. They need an income, they want their tax-free cash, retirement is upon them and they have to make a decision. How cruel to make this decision an irreversible, life-long and, more often than not, uninformed decision.
For healthy people, locking into a guaranteed income at retirement will almost certainly mean a poorer deal. That’s not to say that a lifetime annuity might not become the ideal product for them later in life, but they would be far better keeping their options open and delaying this lock-in until ill health, old age, or indeed, higher interest rates set in.
In the wake of low annuity rates, they also find themselves trading a bit more income for a single-life annuity, in denial (or ignorance) of what that might mean for their spouse if they were to die.
If there is one thing the Government can, and should do, it is to allow people to retire with an income, and some breathing space to figure out what their long-term options are. This is what fixed-term annuities do.
“All I am offering” says Morpheus to Neo as he hands him the choice of pills “is the truth – nothing more”. Don’t retirees deserve the same?
Kim Lerche-Thomsen is chief executive at Primetime Retirement