The goal of a simplified pension system is a worthwhile one but when it comes to protected rights, simplification for its own sake can lead to the baby, or more accurately the old widow, being thrown out with the bath water.
Last week, the Government was criticised by some in the industry for inserting an amendment into the 2007 Pensions Bill that will require spouses and civil partners to buy a joint-life annuity with their protected rights fund, even after contracting out has been abolished in 2012.
The arguments that the admin costs will be greater for two pots rather than one may hold true for life offices but it will not make any difference to the income that the retirees receive, nor will it affect their access to advice.
Many annuity specialists recommend getting more than one type of annuity and the adviser’s commission is determined by the aggregate value of all of the products bought.
What seems like a technical argument for the industry is in fact a serious social issue for many thousands of elderly widows (and some widowers) and a serious policy issue for Government.
The poorest sector of our society is very elderly women and this situation has been compounded by the reality that the vast majority of married people buying annuities, usually men, do not opt for a joint-life annuity with their personal pension fund.
It surely follows, that to remove the requirement to provide for your better half from protected rights funds will only serve to erode widows’ pensions, not improve them.
Age Concern has described this failure to look after spouses as the “selfishness of men” and statistically it is men who are more likely to have built up pensions and are therefore the ones facing the decision.
That is not to say that as many women as men opt for a single-life annuity where they are the ones buying the annuity. But the figures for the number of spouses to be left short-changed once their partner departs this world are quite staggering. Figures from Standard Life released a year ago showed that threequarters of their married annuity customers had bought single life annuities.
I find this an astonishing state of affairs and I cannot believe that three-quarters of retired married couples have sat down and discussed this. I would imagine there are millions of people, mostly women, who are in for a nasty financial surprise following a bereavement.
This is a situation where I have personal knowledge. My aunt, now 90, still talks fondly of her husband, who died of lung cancer 18 months after 30 soot-filled years down a coal mine. But 35 years later, it still hurts her when she reflects that he opted for a higher pension income for the 18 months that he was alive rather than provide anything for her.
Thirty-five years of spouse’s pension exchanged for 18 months’ higher income does not seem like a great deal.
Part of the problem is that people want the highest annuity they can get, which is why so many people go for level annuities rather than index-linked ones. It is human nature to want something now and deal with the future later. Only yesterday, I idly put my lamentable retirement savings plans through a pension calculator and had to stop myself from opting for an annuity that would do nothing to protect my wife, or myself against inflation.
I strongly believe more needs to be done to make sure the issue of survivor benefits is addressed by both parties in a relationship. Somebody who has stayed at home to bring up children should be entitled at the very least to be consulted on whether a joint-life plan should be bought.
This would lead to more regulation but should be done as part of a long overdue overhaul of the annuity purchase process which would reduce the amount of time an adviser should spend, making annuity advice available right down to funds at the trivial commutation level.
If people want to buy an annuity that leaves their partner high and dry, that is their choice. But they should have to look their other half in the face and tell them where they stand.
John Greenwood is editor of Corporate Adviser.