Tag Archives: Pension

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.

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Death knell for final salary pensions

The current economic climate is proving tougher and tougher for defined benefit pension schemes, revealing that perhaps their time is up. According to Aon almost two thirds of the largest private pension schemes are now in deficit. It predicts losses of £226bn for the UK’s remaining final salary schemes.

This is not a good time for companies to make additional contributions – they may be fighting for survival themselves. The Pension Protection Fund (PPF) said it expects pension compensation claims to rise over the next 18 months due to adverse economic conditions.

The PPF is funded in the main through the pension protection levy that occupational pension schemes pay. Loosely speaking, the amount to be paid depends upon the “level of a scheme’s liabilities relating to members” and “the funding level of a scheme and the risk of its sponsoring employer becoming insolvent”. There’s plenty of detail for those who want it on the PPF website.

Interestingly, if you qualify for your pension you get 100% compensation (although inflation indexation may be lower than your original scheme) but if you are not yet old enough to receive your pension the compensation is 90% subject to an overall cap that depends on your age – as at April 2008 that cap for a 65 year old equates to just over £27,770. What about people who are about to retire as opposed to those who have just done so – perhaps only separated by a matter of months – do they really deserve lower compensation? To be honest, the details are far more complex than my brief comments here but there is certainly a discrepancy between members and deferred members and I just don’t see the logic in that.

Is your defined benefit scheme covered by the PPF? You can view the eligibility criteria here.


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ABI targets 30 day annuity transfers

The Association of British Insurers (ABI) has announced an initiative designed to reduce the time taken to make Open Market Option (OMO) payments to pensioners.  The scheme includes creating an electronic information exchange which will, apparently anyway, reduce the time taken to switch annuity providers.  

Are they implying that delays of months are currently caused by a lack of efficient technology?  I suspect they’re actually caused by a lack of motivation to solve the problem.  In fact, 30 days still seems like quite a long time doesn’t it?  Just shows you how low the bar was set initially.

I suppose we’ll have to wait and see what effect this initiative has once we’ve given it time to work.

Women get full rights to state pension

At the moment only 35% of women in retirement get the full basic pension compared to around 95% of men. Many women have broken employment records due to taking time out of work to raise children, resulting in reduced national insurance contributions.  In other words, they haven’t paid their stamps.  Of course this is grossly unfair.

Now, or rather in a short while when the amendment to the pensions bill becomes law, women will be able to buy back national insurance contributions from previous years when they were out of work.  This means they can top up their contributions to qualify for a full state pension.

Gordon Lishman, Director General of Age Concern, said: “We are absolutely delighted by this decision which will give thousands of older women the opportunity to build up a better state pension.” 

In 2010 the number of years of NI contributions needed to qualify for a full basic state pension will come down to 30 for both men and women.  At the moment men need 44 years and women need 39. Those who want to benefit from this new expansion of the ability to top up will need to have 20 years’ contributions  already to qualify.  

This is good news but in reality it’s very little and it doesn’t apply to everybody. You still need to have made your own arrangements if you want a comfortable retirement.

Inflation to cut pensioner spending power by 65%

An Ernst & Young report commissioned by MetLife revealed that inflation of just 4.4% would erode pensioners’ spending power by as much as 65% over the next 25 years.  Pensioners are also being hit hard because such a large proportion of their income goes on food and fuel – both of which have increased at far more than the current overall inflation level.

A significant part of the problem is that many pensioners’ incomes are fixed.  A level annuity is one which pays out the same amount for the duration of the product – it stays the same even though the value of this fixed amount is constantly eroded by inflation.  Research from Standard Life warns that those with a pension pot of £80,000 buying a level annuity, will spend their whole monthly income on basic living costs, such as food and fuel within 20 years of retirement.

When you are about to retire and your pension provider sends you the documentation regarding your retirement options chances are you will receive details of a level annuity.  Not only that but it will probably not take account of whether or not you have a partner, quoting single life rather than the joint life you would prefer. This is pretty much the default and for many it is a poor option.

There are other options:

1. An index-linked annuity is tied to the rate of inflation

2. An escalating annuity rises at a fixed rate each year, regardless of inflation.  Some years the rise may be greater than inflation, some years it may be less.

3. You can even link your income to the ups and downs of investments although this can obviously carry more risk.

4. Level annuity – all of the other options are likely to offer a lower starting income than the equivalent level annuity so some people will opt for this if, for example, they do not expect to live long enough for inflation to matter that much to them.

5. An enhanced annuity is available for those in ill health – this can be significantly more than the standard annuity. According to MGM Advantage around 40% of people could be eligible for an enhanced annuity.

6. A mixture of different annuities.

So, whether your interest is in getting more money from your annuity because you are in poor health, passing your annuity income on to your partner should you die, or protecting your income from inflation make sure you investigate all of the options.  Whatever you do, don’t just accept what your provider offers you as you approach retirement – investigate it yourself or seek professional advice.

More evidence that pensioners are being robbed

I mentioned administrative delays in pensions transfers in a previous post:

Insurers create administrative delays to make it harder to shop around. In fact the FSA is investigating allegations that insurers are delaying transfer of funds when policyholders want to transfer to another provider for their annuity.

Now Virgin Money, ever the customer champion(?), has done some research on the matter.  According to Virgin a fall in annuity rates of 0.5% could cost £10,000 over a 20 year period if the delay was just 3 months.  It really is time to act.

Pension timebomb – latest figures

The latest stats from Eurostat show that deaths are projected to outnumber births in the EU27 from 2015.

From 2015 onwards deaths would outnumber births, and hence population growth due to natural increase would cease. From this point onwards, positive net migration would be the only population growth factor. However, from 2035 this positive net migration would no longer counterbalance the negative natural change, and the population is projected to begin to fall.

From 2015, deaths projected to outnumber births in the EU27, Eurostat News Release, 26.09.2008

At first this might seem like good news to those of us who feel the planet is already pretty crowded but a closer look reveals this:

The EU27 population is also projected to continue to grow older, with the share of the population aged 65 years and over rising from 17.1% in 2008 to 30.0% in 2060, and those aged 80 and over rising from 4.4% to 12.1% over the same period.

So this is where the pension timebomb comes in.  If the population is ageing and everybody wants to retire while they still have the ability to enjoy themselves and be active, who is going to work to support them?

In consequence, the old age dependency ratio in the EU27, i.e. the population aged 65 years and older divided by the working age population, is projected to increase from 25% in 2008 to 53% in 2060. In other words, there would be only two persons of working age for every person aged 65 or more in 2060, compared with four persons to one today.

The numbers just don’t add up.  In fact, even if the birth rates were predicted to grow enough to keep the ratio at 1 to 4 we would soon reach unmanageable population levels anyway.  We can’t keep living longer without consequences.  I’m not saying we shouldn’t live longer, just that we need some radical change if we are to support an ageing population.  In the UK, state pensions are already pathetic and force many to live out their retirement without the money to feed and heat themselves properly.

At the moment, the only way to avoid poverty in retirement is to assume that the state pension will be worthless by the time you retire and invest now to cover your own retirement needs in full.  Anything less is liable to lead to severe disappointment.