Why would any member of the public want to buy a pension plan? Surely, only the most financially unaware consumer fails to realise that pension plans are expensive, poor performing, complicated and touted by the most hard-nosed of salespeople who are only interested in grabbing as much commission as they can.
Oh yes, and then there is this thing called an annuity. Apparently, when you eventually want the benefits from your pension plan, you have to buy something very strange known as an annuity. This is an incredibly complicated financial instrument that involves the planholder handing over their pension fund to an insurance company and never seeing their money again.
Somewhat cynical views of pension plans, perhaps, but can you blame consumers for holding at least some of these opinions?
In the money pages of my Sunday newspaper, Sir Howard Davies is quoted as calling for the compulsory funding of pension plans. I find myself in two minds on this one. Left to their own devices, many employees will not plan for retirement and you cannot really blame them. They may be struggling to pay for the essentials and have little spare cash to set aside for the future. They may be lulled into a false sense of security when told about such things as the minimum income guarantee. Why do anything at all if some future Government is going to look after you? You might just as well spend what little you have on enjoying yourself today.
Frankly, some cosmetic changes in the way annuities work is going to have little impact upon the vast majority of the unpensioned population. Perhaps compulsion is the only realistic way that people will take responsibility for funding their retirement income. But I am against compulsion on principle. I have always believed that people should be able to make up their own mind about whether they need to save for the future.
I am also against the compulsory purchase of an annuity. The argument that says we have to buy one because we accepted tax relief on our contributions is weak. After all, the Government wants us to fund our own retirement, doesn't it?
For those who do decide to save for their future, changes to the annuity regime will be welcomed. Common moans about annuities are twofold. First, they represent poor value for money and, second, they deny the pension fund money to surviving generations.
There are, of course, arguments both ways. The actuarial argument is that the insurance company does not keep the pension fund on the death of the annuitant. Instead, these monies are used to cross-subsidise the annuity rate for survivors. Frankly, I do not believe this argument holds much water. If I die, I do not want my fund to improve the lot of a bunch of strangers, I want it to benefit my family. Perhaps changes to annuities that allow greater transfer of benefits on death will have a positive impact on pension planning.
The poor value for money argument is perhaps easier to contradict. People are living longer, so annuity rates will tend to be lower. As long as annuity providers have to match their liabilities to gilt yields, then, of course, during periods where gilt yields are lower, so will be annuity rates.
Perhaps there is a need for more radical change to stimulate savings. Do away with the need for an annuity altogether and let the consumer decide how best to convert their fund into income and take away tax-free cash at the same time. Now that would be radical.
Nick Bamford is managing director of Informed Choice