When the Inland Revenue brought its consultation on annuities to a close, it left many IFAs and their clients disappointed.
From the start, its refusal to review the compulsory purchase of annuities at the age of 75 looked dogmatic and inflexible, a throwback to the days when bureaucrats knew better than the average member of the public what they should do with their money.
The Retirement Income Reform campaign, which wants that rule changed, did have a point. The former Labour MP who led it, Oonagh McDonald, pointed out that the 75 rule was formulated in the 1920s.
In those days, most people were lucky to live three score years and 10 so the rule was clearly meant for the exceptions who lived too long, not for the majority who now live past the age of 80.
In fact, there is a much simpler argument as to why compulsory purchase of annuities should not be changed. French philosopher Voltaire put it nicely when he went to see a friend on his deathbed, who wondered if he should commit suicide and put an end to his unbearable pain. “I advise you to carry on living, if only to annoy those who pay your annuity,” he said.
An annuity is just that – a bet with the insurance company or, rather, a bet with everyone else within the insurance company's pool of annuitants. You win the bet if you live longer than others. You lose if you die young.
The people who protest about annuities seem to lose sight of this. For the majority with tiny private pension funds (average annuity spend £23,000 generating an income of about £40 a week), the sums are so small that poor annuity rates are neither here nor there. The minority who protest about annuity rates tend to have built up a big pension fund which they regard as capital belonging to them.
They resent having to convert it into an annuity, only to have all that money simply evaporate when they die (or, for a joint life annuity, when their spouse dies).
It is that resentment that makes income drawdown such an easy sell for an unscrupulous adviser. Mitigate inheritance tax, avoid low annuity rates and allow me to collect commission of 3 per cent or more of a nice big chunky fund.
Never mind that it only works to the client's benefit if investment returns are much higher than they are ever likely to be. Never mind that many income-drawdown cli-ents have their money in with-profits funds that falsely reassure clients about the safety of their capital. After all, annuities only pay 1 per cent.
It is indeed a risk with annuities that if you die too soon you will never see the benefit of your pension fund. There are mechanisms within annuities such as guarantee periods which can address that concern. The Revenue is proposing to make those more flexible and that seems sensible.
What is much less sensible is the Revenue's attempt to show flexibility in the face of the objections to annuities. Its suggestion of limited period annuities would entail creating another form of income drawdown where, instead of drawing money straight out of a fund, the client buys “temporary annuities”. Not only would this be hideously complicated. It shows that even the Inland Revenue seems to have forgotten what an annuity is.
The whole point of an annuity – indeed, the whole point of a pension plan – is not just to utilise tax relief so you can build up some giant fund to pass on to your heirs. It is to insure yourself against the risk of being poor in retirement by virtue of living too long. A fiveyear temporary pension annuity is a contradiction in terms.
Poor annuity rates do not reflect profiteering by the insurance companies that provide them. In fact, given the risks the insurer takes, for example, of getting its mortality figures wrong, the margins they make on annuities are wafer-thin.
Those who now face low annuity rates should stop moaning. They have, apart from an unlucky minority, benefited from the share price boom of the 1970s, 1980s and 1990s to an extent that far outshines any drop in annuity rates in recent years.
Not only that, they have also benefited from massive tax reliefs from the taxpayers. By giving tax relief on pensions, the state acknowledges the benefit of having people who can support themselves, no matter how long they live. But it is also a long-term investment by the state in itself.
The billions of pounds in tax relief every year do not come free – the taxman hopes to recoup some of that money when the beneficiary of all that largesse retires and draws an income.
Bob Bullivant at Britannic Retirement Solutions points out that in the 1970s, wealthy investors got immediate tax relief on pension contributions of up to 83 per cent. You could invest, say, £170 to get a gross contribution of £1,000. If the fund then grew to £10,000, you could collect tax-free cash of £2,500. The rest, going to the annuity, was effectively free.
Tax relief on pensions is, in that sense, regressive. They cost billions and the people who benefit most from the taxman's largesse are the wealthiest private savers. The taxpayer should not be giving away that kind of benefit without getting something back.
The whole point of a pension plan is not only to provide inc-ome in retirement. It is also to ensure that income is paid until death – no matter how long the pensioner lives. Annuities are compulsory – and should be – because they do exactly that.
Andrew Verity is personal finance correspondent for the BBC