Don’t risk your retirement plan on a course no-hoper
Exactly 22 years ago, I wrote an article which got me into lots of trouble. In it I compared the 1997 Grand National (which took place two days late on a Monday thanks to bomb threats by the IRA) to the difficult hurdles facing investors with accumulated pension pots trying to fathom the best way of turning them into an income for life without falling by the wayside.
At the time I wrote that the Grand National was a gruelling test of horse and jockey and of the 36 starters, only 17 finished, an unusually high proportion. On average only a quarter were expected to complete it. On Saturday, 19 out of the 40 starters managed to find their way to the finishing line.
The National course still has the same number of hurdles, albeit not as dangerous these days. But for those of us facing the daunting prospect of selecting the best retirement income method today, if I thought it was damned difficult back in April 1997, it’s become much harder to complete the course as the hurdles have multiplied alarmingly.
In my original article I reminded would-be buyers of a retirement income that the options had already increased over the previous five years when all that was on offer was an annuity of some description. And even then, evidence showed the majority of annuity buyers fell at the first fence making the mistake of not picking an experienced jockey to help them round the course.
By 1997 various alternative hurdles added to the confusion, brought on by industry innovations and falling “Gilt yields” or, if you prefer, “long interest rates”, and an intervention by an insurance company by the name of Equitable Life. And that’s where I got “into trouble”.
It had developed a new type of “annuity” which didn’t tie you into a fixed annuity income as before. They called it “income drawdown” and, cutting a long story short, it was clear to me that its boast of lower charges and higher returns was a scam and outright dangerous. It wasn’t happy and succeeded in shutting me up. Regulators didn’t bother to mark its card, retirees piled in with their life savings for their “sure bet” and within three years the company’s punters were losing their shirts.
A couple of other systems were available, cheaper and more tax effective, but any alternative to a guaranteed annuity was attractive only if interest rates and stock markets kept rising. At the time I calculated punters would need an 11% annual return to produce better returns than a decent annuity. And at the time, in any case, at age 75 an annuity had to be purchased.
Twenty two years ago I warned that unlike overcoming the Grand National hurdles, which only took nine or ten minutes with luck and an experienced jockey, selecting the best “annuity system” would only be obvious over the following ten to 20 years. And picking the wrong course of action would have you fall into financial difficulty long before your “finishing line”.
Thanks to ever reducing long interest rates, increased life expectancy and volatile stock markets, instead of 11% average returns, it’s turned out to be a mere 4% at best for the majority who picked the wrong horses 22 years ago.
And now with umpteen changes of pension’s law, a myriad of “runners” and handicaps, not to mention a doubling of hurdles to overcome added to an increasing number of punters unprepared to hire an experienced “jockey” to guide them over the course, it will be a miracle if many reach their finishing line in decent financial shape.
According to recent research “a majority of the over-55s neither want an adviser (jockey) nor are prepared to pay for one. Some 60% of them reckoned they didn’t need one and 30% said ‘it was a waste of money’ “. So that doesn’t look good does it? A course at least twice as difficult as it was over 20 years ago, a history of fallen “riders” whose bets went awry, and still far too many don’t realise the glory days of high interest rates in the 1970s and 1980s have gone, and were an outlier anyway.
Annuity rates depend mainly on long Gilt Yields. During the 1970s and 1980s the average yield was around 11% with highs of 15.8% in 1981. By 1997 that had halved. Punters assumed wrongly that rates would rise again. But if you study yields back to 1900 it’s obvious a typical yield lies around 3% to 4%. Right now it’s about 3%. If you think you can take an income of 8% or higher with umpteen hurdles in your way without an experienced pair of hands holding the reins I wouldn’t hold out any hope of success.
It’s one thing having a flutter on the Grand National. It’s quite another throwing your pensions pot on any retirement income ‘nag’ without taking time first with a professional to study form. After all, the system you choose may have to fund the next 30 years. Think about that.