What can you do with small annuities?

If you have less than £5,000 in your pension pot then I believe you should be able to take it as cash. The fact is that annuities cannot really be bought with less than around £3,000 and those under £5,000 are not common. Anybody trying to shop around for an annuity after exercising the Open Market Option will already know that choices are limited. 

In 2007, the Association of British Insurers (ABI) reports that there were around 102,000 annuities sold with a value of less than £5,000.  That’s a lot of people being forced into very small annuities. Just to demonstrate the futility of this, a pension pot of £2,000 could earn you around £10 per month. What on earth are you going to do with that? Far better to take the £2,000 cash and do something useful with it.

I have mixed feelings about compulsory annuities anyway. Why should we be forced to take an annuity just because we reach the age of 75? What if your life expectancy is 5 years? Or even 1 year? I know you can get much more from an enhanced annuity that takes your health into account but surely you’d be better off with just the cash. And what about those of us who are reasonable financially sophisticated and would prefer to be in charge of our own finances – can we not choose for ourselves?

On the other hand, just like putting fluoride in the water supply, you manage to ensure the general welfare of the greatest number of people. You also remove the possibility of certain foolish actions – if I get my pension pot and bet it on a horse that loses I could end up relying on a state pension. The fact that the majority of your pension has to be paid to you monthly over a long period of time also pretty much precludes you going out and blowing it all on a gin palace pleasure boat (substitute your own favourite toy). You could argue that this prevents moral hazard e.g. I spend all my cash on fast cars, boats etc then rely upon the state to pay for my long term care.

I freely admit that I don’t know the answer. I hate being told what to do by a nanny state but I don’t want vulnerable members of our society blowing their hard earned pensions. I am certain though that people with smaller pensions pots (under £5,000) should simply be allowed to cash it in. There is no moral hazard here and no real impact on monthly income.

No Europe-wide rescue

A consortium of German financial institutions has pulled out of a rescue package for Germany’s second largest commercial property lender, Hypo Real Estate. The BBC reports this:

News of the failed plan came as leaders of the major European economies met in the French capital for talks hosted by President Nicolas Sarkozy.

Britain, Germany, Italy and France all agreed to work together to support financial institutions but did not agree to set up a big rescue fund similar to that of the US.

They decided instead to seek a relaxation of the EU rules governing the amount of money individual states can borrow.

What’s interesting is this: (1) there will be no Europe-wide bailout and (2) they want individual states to have their credit limits raised.  So first of all, the big nations will not take part in a rescue plan that covers the banks of other nations – quite right, I’m very glad about that part.  Secondly, we are transferring the over-leveraged positions of banks onto nations.  Whole nations of taxpayers being lumbered with debt to bail out irresponsible, and now very wealthy, bankers.

The old term ‘moral hazard’ has never been more appropriate.  Do whatever you like and the government will bail you out – meanwhile you keep all the cash!  Mr Sarkozy talks of vague measures but when the dust settles I’d like to see just how many heads have actually rolled into his little guillotine basket:

Mr Sarkozy announced a series of other measures – including unspecified action against the executives of failed banks.

Speaking after the meeting at a joint news conference, he said the four had agreed that the leaders of a financial institution that had to be rescued should be “sanctioned”.

The Germans do not want to intervene but at the same time they don’t want to be the only ones that don’t do so as it puts their banks at greater risk in comparison to overseas competitors:

Meanwhile German Chancellor Angela Merkel called on EU countries not to take steps at home that could cause problems for other member states.

Meanwhile, it is becoming clear that there has been no particular rush to transfer cash from UK banks into Irish ones.  Perhaps people have realised that the guarantee only means something if the country has the money to back it up.