Annuities: how to benefit from the small print
On the way back from my annual homage to Ibiza I bought a British newspaper in the airport. Turning to the Money section I was appalled to read some of the most irresponsible financial reporting I’ve seen in a long time. And that’s saying something.
It concerned what the scribbler called “Rip Off Annuities”. Say something long enough in respected newspapers and readers start believing it.
I’ve seen it over the years with Ibiza for example. Folks who’ve never been there express astonishment that I’ve been a fan for more than 39 years. They read it’s a crap place to go and they believe it. So they don’t go. Try explaining that it’s more expensive to buy property there than in Barcelona and you’re met with incredulity.
In the world’s slimmest book, the Actuaries Joke Book, you will read that the problem with savers is that 50% of them don’t know what 50% is. Over the 43 years since I became an IFA I’ve advised thousands of people. Hardly any fully understood percentages.
And most folk have an aversion to financial jargon and small print. Despite thirty years of UK financial regulation I still find I have to remind clients that the large print giveth and the small print taketh away. If you add an aversion to numbers along, and irresponsible reporting by sections of the money media more interested in sensationalism, you have the perfect scenario for poor decision making by savers, particularly when it comes to pensions and annuities.
An annuity simply turns an accumulated private plan into a guaranteed income for life, typically when you’re between 60 and 75. I remember a survey two or three years back finding that roughly three in four retirees wanted an income guaranteed until they died, but the same survey found that the same number didn’t want to buy an annuity. Eh?
Commentators claim that annuitants didn’t know they could shop around for better terms, ignoring the fact it was the 1975 Finance Act that introduced the ability to do so. Ahem… that was 41 years ago !
Hey, there’s no doubt there’s a big problem facing today’s and tomorrow’s retirees with private pensions. At the heart of an annuity lies medium term gilts. A gilt is when the UK Government borrows money from you and guarantees to pay a fixed interest rate back to you for a fixed term, then returns the money.
Problem is of course that interest rates have been falling for about 35 years Right now they’re lower than they’ve been going all the way back to 1900, by quite a margin. From 1900 for 70 years the average medium term gilt yield was 4.08%. From 2000 until 2009 it was 4.4%. Since then it has averaged only 3.1% with a return of less than 2% last year. Even worse the income yield has averaged 1.14% this year so far. Cripes.
However, all that hasn’t fully sunk in given that between 1969 and 1990 inclusive ( the glory days for annuitants ) the 10 year gilt yield averaged more than 10%, with highs of 17% and 15.8% in the 1970s and 1980s. So those retiring years ago received high annuity returns and folks today understandably feel shortchanged.
In the ‘paper in Ibiza I read about a couple moaning about their “rip off annuity” because it was paying out only £2,800 a year, and they’d hoped if they’d been able to sell it under Pensions Freedom they would have been able to buy a café.
First, the reason they have so little income is because the pension fund they built wasn’t big enough. Second, there’s a fair chance nobody would have wanted to buy their annuity.
A report a few years back found, for example, that in three-quarters of annuities bought, after five years income, when the owner died there was nothing left for their marriage partner. In other words, worthless.
How come? Because of what I mentioned above, an aversion to numbers, jargon and small print. People at retirement have been making terrible decisions and, by the looks of it, they still are. And a sensationalist media doesn’t help. Neither does the fact that, despite FCA rules which if added together would reach 6ft 2 ins, there are none regulating the media.
As the Chinese say, the best time to plant a tree was 25 years ago. If you want to maximise your income and safeguard your family in retirement, best go see an independent expert – 25 years ago.
If you’ve left it late and now have existing private pensions, please ensure you understand the small print. Many, many plans sold before the mid 1990s have valuable income guarantees hidden deep inside if you know where to look. We’ve seen income yields guaranteed up to 18% a year, though more commonly 10% to 12%, even including widow’s protection.
And please remember this….if you take advice from the company with whom you have the pension, the person speaking to you by law is acting in the interests of his or her employer. Not you. By law an IFA acts in your best interests. Or should be. Shop around.