View more on these topics

Outside Edge – Nick Bamford

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&#39t 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

Recommended

Summer surprises

Three momentous matches will take place this summer. Ron Sandler will be reunited with his report (which has been circulating around Whitehall in draft for several months). Christine Farnish will take up her post as chief executive with the National Association of Pension Funds (which has been on the cards for weeks). And Gordon Brown […]

Clerical Medical launches pensions transfer support

Clerical Medical has enhanced the terms on its pension transfer business with the launch of a support back for IFAs.The transfer service provides the adviser with a comprehensive report of the options available to their client. Once an enquiry form is completed, Clerical looks after the data, analyses it and produces a full report on […]

Pinnacle launches sports accident cover products

Pinnacle Insurance says its long association with the sporting world has inspired the development of four sports accident products to help alleviate associated financial concerns. It says the highly competitive nature of today&#39s amateur sport makes the chances of suffering an injury greater than ever and a serious injury could result in months of work […]

Widows improves website

Scottish Widows is revamping its extranet service next month with the addition of fund performance data powered by Morningstar.The scottishwidows.co.uk/ifa site has been overhauled to give improved navigability, with more content available in front of the secure log-in.Morningstar will provide independent data analysis to help IFAs research and support investment decisions, as well as check […]

Seeking quality in uncertain markets

By Ewan McAlpine, Senior Client Portfolio Manager In uncertain times, investors naturally seek safety. But in fixed income markets, what does that really mean? Ewan McAlpine outlines the approach RLAM’s Fixed Income Team will be adopting across its credit funds in response to potentially volatile markets this year. Click here for full article

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com