MSE News: Pension system 'needs urgent reform'

dunstonh

it means that even 'the best' annuity provider will get a very good return from an individual's pension pot.

The tables you are looking at wont be giving you the best rates. They are sample rates which are rarely accurate. However, they are a good guide and they are closer to the figures than they used to be. Indeed, in some cases now, they may well be the accurate figure.

The big problem remains that, with a 'simple' annuity (pension investment) your estate loses all the money if you die early

Only if you buy options with no death guarantees. Also, if you dont like the annuity option then you can look at the alternatives.

jiMOB

In my example I used a very simple 'flat level' but with that example the 'flat figure' of £497 per month would drop to only £283 per month if it was linked to RPI; hardly an attractive proposition.

In addition, if "30 year gilt yields are 3.95% today" but "you would need to have an annual rate of return of 3.91% on the pot such that it would be zero after 26 years", aged 86 (on my example); however you look at this it's always going to mean that the vast majority of annuity purchasers MUST 'lose out'.

This might be how insurance works and is possibly acceptable with things like my house or car insurance but it is not fair and is totally unacceptable with the colossal sums involved with pension investment.

I know "you don't have to buy an annuity" and "there are alternatives" but until this is made more transparent (and dare I say it) 'attractive' to the average person, the confusion will persist.

You cannot blame people for not trusting the 'financial whizz kids' when there is so much evidence of wrong doing.

hugheskevi

The academic experts in the field of annuty value are Cannon and Tonks. They wrote a comprehensive report a couple of years back, which can be found here.

The report is probably not very accessible to the lay person, but the main finding is that the average person can expect to get back about 90% of the money they pay for a flat annuity, taking into account yields, etc. So an annuity 'costs' about 10% of your pension pot.

This is much better than many other insurance products, eg motor insurance at c80% or domestic property at c60%. I would expect that annuities have much lower overheads than those products (eg an annuity is a one-off transaction rather than annual, there are only a small number of activities, normally involving death, etc)

Note that RPI linked annuties have a much lower expected return - not surprising perhaps, as you are effectively buying more insurance, so you would expect to have to pay a higher price.

jiMOB

Thanks. The sources of information that you have suggested have helped a lot to explain this rather complex subject.

This means that whilst the 'simple annuity' doesn't look too bad, the means of getting there remains a real problem in that very poor returns together with the uncertainty of 'losing money' will still put people off.

jamesd

Trouble is that the simple annuity actually is bad, but it doesn't show up in the money's worth calculations because those tend to have a built in bias in favour of annuities. That bias comes from comparing with investments that have very poor returns, but high certainty, UK government bonds. That's OK for an insurance company that has a regulator that requires using those poor investments and which has no flexibility at all in how much money is paid out.

It's not OK for an annuity purchaser who could instead use investments that offer better returns, varying income if they happen to hit a period when the generally higher investment returns happen to be below the long term expectation. The investor can also just buy those government bonds directly if they want the protection, using whatever degree of protection they desire.

What the individual can't do is profit directly from the death of other annuity buyers, while an insurance company can and can use that to increase payments above the returns that the safe investments pay. Unfortunately the nice theoretical benefit doesn't seem to be reflected in the actual payout levels, which are still pretty dire.

Over the years the insurance companies have been recognising the poor performance of the government bonds and using more corporate bonds but they are still pretty poor compared to more general investment mixtures. And money's worth measures still pretend that they are using the safe government bonds, not the somewhat more risky corporate bonds, giving them another artificial boost in the calculation.

Loughton_Monkey

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That's easy for you to say.