15th December 2015
In the world of financial services, and pensions in particular, it’s rare to see any reference made to the lessons of our childhood writes Steve Herbert, head of benefits strategy at Jelf Employee Benefits…
Yet recent criticism of pension annuities has reminded me of that most well-known of Aesop’s fables; The Tortoise and the Hare.
Now we all know how this one goes, yet we may have forgotten to apply this logic to the world of retirement options. For it took very little time for the poor old Tortoise of our tale – the humble annuity – to be written-off once George Osborne had fired the starting gun in the Pension Freedoms race.
The latest in a long line of attacks on the value and viability of annuities comes from Cass Business School – with their thoughts available via this link.
For the record I am not about to argue with any of the calculations or thoughts that have been advanced against annuities. It is self-evident that in pure monetary terms they currently offer fairly poor value for the average life expectancy of a pensioner. The assumption is therefore that most retirees could do better through the racier and more striking hare of this story; the new retirement options of the post pension freedoms world.
So the smart money in this race is not currently backing the Tortoise. But as the fable demonstrates, all may not be as it seems. Whilst the calculations in favour of the Hare seem unarguable, they perhaps do not allow for the vagaries of human nature. Most of the options to produce better outcomes require a degree of interest and attention in financial matters that many retirees don’t have or want. And even those with an active interest will need to show a degree (in fact more than a degree) of budgeting and self-control over a very long period of time.
Maybe the pensioner will spend the value of their savings on presents for the grandchildren. This really happens. Only last week I met a lady who had spent £1,400 on Christmas presents for her 13 grandchildren – and was running a stall in a boot-fair to try and raise some cash for her own use at Christmas.
Or will the retiree be persuaded to part with funds to secure a big ticket item for younger relatives such as a further education opportunity or house deposit? Or perhaps they will just spend too much, too quickly, and find themselves with many years of retired life ahead and no pension to support it.
And with such a long period circumstances will inevitably change, as indeed may the physical and mental health of the annuitant. What if the pensioner is hospitalised and/or unable to make decisions? Do the bills get paid in their absence?
Finally, of course, what if the pensioner lives beyond average life expectancy? By definition many will, and as the years roll by they are ever more likely to have been better served with a guaranteed income.
An old fashioned annuity would have mitigated or avoided all the above issues. Annuities have served British savers well over the years – and will hopefully continue to do so again in the future.
The bottom line is that the plodding Tortoise annuity will always make the finishing line, whereas the dashing Hare of pension freedoms brings excitement – and risk – to the show. Both have their place and are viable options for retirees.
The crucial lesson from this particular fable is that the pensions industry must aim to direct clients to the right course of action for each and every individual based on more than financial calculations alone. This may, and probably will, present some practical challenges to the industry, regulators and indeed the politicians that began this process. But it is essential for the financial future of the nation that we get this right from outset.
I will be watching this particular race with interest.
Best regards (and Merry Christmas).