Cowie's Quick Guides, part 1 – Annuities

Ian Cowie begins his guide to all aspects of saving, investing and pensions with all you need to know about annuities.

What's new?

theitalianjob: No one denies we need to save for retirement.  The main issues with pensions are the only person who CANT get their hands on your pot of money is…YOU!!!   The government dips in (repeatedly) before you retire, financial institutions dip in with thier commissions/annual mgmt fees etc. and the Insurance companies keep the surplus pot when you die post retirement.  All in all, a pretty bum deal all round. As for the 'guaranteed income for life'  and FSCS covering up to 90% - a) look at the ongoing con that was and is Equitable Life  and b) I wouldn't want to be a pensoiner (aged 75 or above) having my annuity provider go bust and end up diieing watiing for te FSCS to pay out!! Very reassuring - NOT!!

jamesallington1956: The lack of access is the price you pay for the tax relief on contributions. If you don't like the restrictions on access then there is a simple solution, use an ISA.

steviebaby: Question: So what you're saying is, if I 'invest' 100K in an annuity before I retire, then a year after retiring I kick the bucket, the insurance company keep all of my money, with not a penny going to my wife?  Jeez, if that's so then it sucks!

jamesallington1956: No, that;s not right. You have the choice at outset to buy a spouse's pension, which will mean that the income continues to your partner. You could also include value protection which would provide a lump sum on your death. If you don't include these things then yes, your payments will stop, but they don't go to the insurer, they go into the Annuity pool to subsidise those people who live longer than expected.

hammerstein: Are you saying the insurer doesn't take any mortality experience profit for shareholders?  That doesn't sound plausible!

steviebaby: Thanks for clarifying the point, james. 

poultryhouse: A 65 year old man saves 100k and then buys an annuity giving him 5K income.  Truely shocking.  Why on earth bother.  The punter would be much better off on income support and he could have at least enjoyed his 100k saved throughout his working life.

CATTY&Co.: A - All pension pots are stolen at the end B - Buy your house sooner instead C - Consumer price index is what your pension is probably based on now D - Defined benefits are probably not E - Employers get a nice backhander on the sales commission F - Final salary schemes are there to make you work till 70 G - Government Actuaries Department has already factored this in

shane45: more like batty&co after those comments

jamesallington1956: A - No they are not, to say so is simply absurd and will put people off planning for their retirement B - Unless you plan to take in a lodge that isn;t going to pay the bills when you retire C - Agree D - Agreed E - Ridiculous comment, there is very little commission paid in the group pension market at the moment and there will be none after 1/1/2013, ever heard of RDR? F - Er, wrong again, plenty of final salary schemes have retirement ages of 65 and younger G - Not sure what you are getting at here Pensions can be run very cheaply and can perform well, they just take some effort. Peddling such nonsense does nothing to encourage people to plan for their retirement. If you don't like pensions then don't use them,use ISAs, property, savings etc.

costamonkey:  james There are none so blind as those that will not see. Wanton ignorance will allways trump reasoned and informed opinion (in the mind of the detractors).

Tadcuwyrdd: "Pensions can be run very cheaply and can perform well" Can be,  yes, but British pensions fail on both counts. 1)  British pensions are run on the basis of "individual pots" which increases overheads substantially compared to one big pot which is shared among everyone in proportion to how much they have put in - like the Dutch system.  As a result Dutch  pensions can be up to 50% more than the same contributions put into a British pension. "Can be run cheaply" - please don't make me laugh. 2)  Scottish Widows pension report 2012:-   The return on the average British pension fund has been 1.8% pa over the last 5 years, 3% pa over the last 10 years and 3% pa over the last 15 years.  Compare this to the fantasy returns they use for illustration when selling you a pension plan :-  Low 5%, Medium 7% and High 9%.  The real rate is so much less than inflation it means the average British pension pot is shrinking rapidly every year in real purchasing power terms.   "Can perform well"  Please, my sides are aching from your last joke.

stelmaria: Yes, I am intending to transfer my NI (UK) state contributions over to my old GAK (Dutch) record so I can draw my state pension from the Netherlands and not UK. If the EU is all connected in 25 years time, that is :-)

jamesallington1956: 1.) Not all British pots are run on an individual basis, a money purchase occupational scheme isn't, nor is a final salary scheme. Also, you are just regurgitating an old press story about Dutch pensions, there are plenty of low cost options here in the UK. You can buy a FTSE 100 Tracker through someone like Best Invest for just 0.27% TER, that's £270 per year per £100,000 invested, hardly expensive and you would have had around 200% return over 12 years, again, not bad at all. (Paste performance etc etc) 2. Again, you are just looking at the headline. Yes,, the 'average' pension may have done only 3% pa pver 10 years, but that's because the 'average' pension investor takes no interest whatsoever in reviewing their pension or the investments held within it. A bit of time and effort can find a low charged option and some above average performance, no need to go to the land of clogs and tuplips!

eccyman: Annuities are horrible products, for the buyers anyway.  You chuck a wedge of money at an insurance company  aged 65 with a twenty year pay back, they then keep the money when you peg it. In return they give you the kind of yield a decent investment trust will provide!

charlescawley: Again and again childish patronising cartoons are used in matters connected with pension fund provision. This give the game away about how the sector sees its victims.

skooldog: Charles, the cartoons are supplied by the DT, not by the pensions companies.  The DT uses cartoons for many of its personal finance articles. It gives the game away about how dull personal finance is perceived by the DT to be, hence the notion that cartoons need to be used to make the topic more colourful.

charlescawley: skooldog The finance people spend large sums in advertising.  They could easily remark about these childish pictures.  That they do not makes the point. Pensions are a huge investment and treating people as if they were immature feckless baby adults does indicate a disturbing attitude.

BigNick_Sussex: Charlescawley: Pensions are indeed an investment (whether they're huge or not is another matter) but I suspect a lot of people are indeed inept or ill-informed on these matters rather than feckless. A quick poll of my social circle (average age 50) shows that few have made any provision for a pension and just shrug their shoulders and mutter that the state will have to support them in their retirement…scary times ahead for all concerned!

charlescawley: BigNick_Sussex If you treat people like children they will act like children. If the whole pensions selling sector started treating people like grownups, things would change.  Because people may not know of or understand some things, does not prevent speaking to them in simple terms. Instead, we have a veil of complexity… most likely there to disguise the poor value, practices and attitudes of the pensions sector.  Simplicity should not be confused with naivety or treating people in a simplistic way. What is needed is a little more respect and simple but highly focused and adept communication.  Of course, this is highly unlikely to happen; simplicity affords few hiding places for deceptive sales techniques. This sort of thing is why the pension sector is so distrusted and why, in many cases, people will not hand over their cash to high pressure salesmen using confusion and obfuscation to try to make what they call 'fixes'. Pensions should not be 'sold' they should be provided. However, once the nasty sales started to gather momentum so distrust grew and so more cunning sales techniques were requried snowballing to the inevitable trust breakdown we now see. The pensions sector was infected, just like the banks, with a shark like mentality treating all its customers as prey. The City has only itself to blame.

Tadcuwyrdd: "That means their widows will not get a penny income from the annuity provider after the man dies. So, when it comes to making the second-biggest financial decision of their life, many men get it wrong." Of course all men are idiots as usual.  The fact that my wife gets a full teacher's pension, much more than mine, is completely irrelevant, is it?  Must I sacrifice a large portion of my pension so that when I die she can get even more pension?  After my heart attack it is even more likely that she will outlive me. Some of us "wrong" men decide on a single life pension after much deliberation because it is the sensible thing to do.  We are not all stupid Mr Cowie.  We can actually count and manage to figure out the best deal, to suit our joint circumstances, all on our own.

stelmaria: Tadcuwyrdd: I didn't get the impression the article was saying "all men are idiots", personally. I think is fair to say that many men AND many women have no idea what they're doing when it comes to making pension-related decisions. Also that many women earn less than their husbands in the course of a lifetime and the pension pot of primary importance may frequently be in the husband's name. What bothers me most though is the fact that the VAST majority of married women I know do not understand their own pension arrangements/provisions and leave all "financial matters" to their husbands when the impact is equally shared (for hopefully many years). Including "big" pension decisions, when they may or may not be sufficiently informed to do so.

micicle: The article mentions two annuity providers: Prudential and Aviva. Interestingly, if you bought shares in these companies, the dividend yield is approximately 8% for Aviva and 3.4% for Prudential; an average yield of 5.7% and you still own the capital and the dividend may grow if the companies prosper.