I was shocked last week at the announcement that Annuities had dropped by a third over the past six months, debated whether to change my blog but settled for a footnote, whilst I checked on it.
It is a nonsense that a lifetime savings can drop so suddenly at a time when those concerned have no choice, but is typical of annuities and the whole private pension system, which has become a speculative lottery.
One needs to save over a minimum of forty years to afford and build up a reasonable pension fund and it is therefore unreasonable to be forced to decide within a few months what to do with that money and ridiculous to have to give it away to ensure an income for life.
Although initiated by the Revenue (scared of tax evasion), it has been made worse by the pension providers. At retirement, hard earned savings are put in limbo, earning little or no interest and a quotation valid for a few weeks is given for that money to be exchanged for a guaranteed payment for life.
In a well ordered Society such an exchange was reasonable and beneficial, maximising the amount available from varying life expectancy and giving a secure income, until it met modern commercial greed and speculation. The money still exists; it has earning power and yet annuity rates no longer reflect this.
It can be shown quite simply that even with the worst increased population projections for persons, an annuity return of 6%, with inflation increases of 2.5% annually is possible. Yet current annuity rates are 2 to 3% less than this, now at 3.57% joint or 4.1% single life and yet at one stage were as high as 16%.
Currently In order to give a basic living standard, one needs a pension income of £9,000 per year plus basic State pension, at 6% this requires a minimum Fund of £150,000, however if this drops to 4% return, the Fund increases to £225,000. To meet this pension savings have to increase by half as much as expected or income drops to £6,000.
With present Life expectancy at age 65 at 20 years, one could draw an income of 5% before any fund runs out, if the fund earns 4% then this would extend to some 30 years or an increased drawdown of 7% or an inflation proofed drawdown of 6%. This shows how much a rip off annuities have become.
The obvious solution is living Funds, that do not die at retirement, to be replaced by an almost worthless promise, if they were treated as savings, then total funds would transfer smoothly at retirement to your personal account to be withdrawn on a steady basis. The Revenue do not like this but it can be done in a limited manner.
Drawdown is possible at present; Funds are held by your pension Provider and paid out monthly but are set at a level agreed by the Revenue every year, which is costly, usually attracts poor returns and not considered worthwhile under £100,000 Funds. The stated aim is to ensure that the money will last your expected lifetime, to basically save the State money.
As usual this has not been thought through properly; is dominated by mistrust and State economic motives. It is your money, saved over a long time, why should you be subject to restrictions not imposed on those who do not bother to save. Of course some common sense is needed as many simply cannot budget, and Funds need to last your lifetime.
Simple inexpensive rules can be devised for self protection and a guaranteed Pension Bond devised outside of the Commercial markets and therefore non-negotiable and run by mutual Pension Societies or Associations, Banks or other bodies as long as a minimum return of say 4% is given.
The approach can be very flexible, rules could be based on 6% drawdown from £150,000 Fund; savings above that can be freed of all restriction; taken at a higher rate or even a tax free lump sum, limited in value.
Of course one can forget the tax relief and make your own pension savings free of all rules as many do in property and investments, but this is only viable for a well informed and capable few.
Although the proposed UFDBPS scheme is preferred with continuity through work and retirement and advantages of NI rebate and life expectancy variations, this half way house alternative is much better than the existing system.
Once the principle of personal savings for pension funds are accepted, with more open competitive treatment and PYF targets, then many of the existing problems of performance, charges and security disappear. This leaves the way open for a more positive and dynamic pension systems to meet modern needs.
Annuities, Public Sector, NHS, Teachers, Police, Local Government, Hutton, State Pensions, Transport, Comment
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