Pensions down 75% in 10 years

EdInvestor

Guardian

Consultants Watson Wyatt said its figures show that someone retiring now with a personal pension could be more than 75% worse off than someone paying the same contributions each month but retiring 10 years ago.Lower returns on investments mean that pension pots after saving for 20 years are less than half the level they would have been ten years ago and annuity rates - used to convert pension pots into income - have also fallen by nearly half over the same period. Once these two cuts are combined, the resulting income is down by 78% for a man and 76% for a woman, for savings of identical amounts.


#Since investment returns have now recovered, perhaps the solution to the problem is to cut the link between the pension fund and the annuity?

After all, it's only here that people think they have to use annuities.In other countries, hardly anyone would even consider trading in all their capital for an amount much the same as what you would get on cash in the bank.

dunstonh

#Since investment returns have now recovered, perhaps the solution to the problem is to cut the link between the pension fund and the annuity?

It does seem strange that the Govt insist on this still.

I can understand the Govt doesnt want people squandering the fund built up with the tax relief and then have to pay pension credits but if they altered pensions to be a lifetime account. In other words, you cannot draw the money out beyond a maxmium annual percentage that would be so much better for all concerned. The "investor" would keep the money invested which helps the stockmarket and uk companies. The fund can be passed to spouse on death meaning they wont be financially worse off and need to be paid pension credits. They could even bring pensions into the estate for IHT purposes as getting 60% of a pension fund is better than getting 100% of nothing.

The wealth is then passed on to younger generations to help them fund their own retirement or cover the increased cost of living.

jamesd

Who would buy the gilts if they did that? Perhaps more companies should follow Norwich Union and start to switch to securing the annuity funds with mortgage-backed securities.

EdInvestor

dunstonh wrote:

I can understand the Govt doesnt want people squandering the fund built up with the tax relief and then have to pay pension credits but if they altered pensions to be a lifetime account. In other words, you cannot draw the money out beyond a maxmium annual percentage that would be so much better for all concerned.....

I think it's called income drawdown

Who would buy the gilts if they did that?

Quite a few of our more cautious brethren have a chunk of gilts in their drawdowns, it reduces risk and you can hold them directly, so costs are low. It doesn't really make sense to put all your money in retirement into gilts (via an annuity) any more than it's sensible to put it all in equities,IMHO.

dunstonh

I think it's called income drawdown

income drawdown still gets hit with issues at age 75. Plus the structure that is currently in place for income drawdown requirements is not flexible enough.

EdInvestor

income drawdown still gets hit with issues at age 75. Plus the structure that is currently in place for income drawdown requirements is not flexible enough.

I'd agree with that. Can't really see why they have this bee in their bonnet about age 75 annuities /ASPs etc.

A lifetime account which just runs straight through would be much better. At present if you die in drawdown your spouse can take 65% of the fund in cash, 35% goes as a repayment of the tax relief you got before. So the spouse won't be left in poverty.There are clear limits on how much you can take out so running out of money is pretty unlikely.

I believe there are quite a lot of rich people who have money invested in pensions from which they don't take an income at all: they use the pensions as a kind of "insurance policy", taking advantage of the rule which says if you die before taking a pension, the whole fund goes to the beneficiaries (including the tax relief) with no tax charge.

This annoys the Government, as the basis of pensions is that you get tax relief going in, but pay tax on the income coming out.

However IMHO it's time the Government stopped basing its pension policy on the behaviour of a few rich people and started thinking about what was good for the large number of ordinary people who will retire in the future with money purchase pensions and need to take an income.

Annuities just aren't the solution any more.