Slim pickings should prompt early action on your retirement plan
When I get older
Losing my hair
Many years from now
Will you still be telling me my income’s fine
Enjoy meals with a bottle of wine
Will you still need me
With enough dosh left to feed me
When I’m 84?
(apologies to The Beatles)
The last time I saw so many articles and surveys about pensions and retirement issues, including why so many retirees will run out of money, was six years ago after George Osborne changed the restrictive rules which, until then, had decreed that by age 75, at the very latest, you had to buy an annuity with your private pension pot. The media called it ‘Pensions Freedom’ and it was heralded by commentators as great news for pension investors because they’d no longer be forced to buy what everybody by then was calling either ‘rip-off’ or ‘straitjacket annuities’.
Why the widespread criticism of annuities at the time? You may not have thought too much about how annuities are priced (let’s face it, that’s not an exciting topic of conversation in non-actuarial households) but a key factor is the interest rate level as measured by 15 year gilt yields. Now you can see why most folks discuss anything else instead. And why our eyes glaze over when pensions are mentioned.
Thanks to various economic forces over which umpteen experts still disagree, gilt yields and short term interest rates (such as building society deposit rates) had been falling steadily through to 2015 for the best part of 40 years. And by 2015 a consensus of economics experts formed the view that these rates couldn’t get any lower. They didn’t foresee an immediate rise in rates but argued that in a maximum of five years we’d see a return of higher rates which would push up gilt yields which, in turn, would trigger higher annuity rates. In other words, more guaranteed income.
Meantime, widespread pressure was put on the Chancellor of the Exchequer to free pensions prisoners from having to turn their accumulated pension pots into the pathetic income accruing from ‘poor value for money straitjacket’ annuities. And the pressure worked. George Osborne announced nobody need buy an annuity ever again. Pensions Freedom was the cry.
I remember articles explaining that all you had to do was switch over to a drawdown alternative and just help yourself to an income higher than an annuity could provide. Then when interest rates move up again in a few years, flip over and then buy your annuity which, of course, has the benefit of being guaranteed for life. At the time I wrote about things that few were mentioning… the drawbacks. What do they say about free lunches?
One of the problems, even only six years ago, is that too many financial commentators apparently hadn’t noticed that low gilt yields had been the norm since at least 1900. The exception was the double digit gilt yields between the 1970s and the 1990s when we also saw double digit inflation. The highest gilt yield was 17% in 1974. In the 1980s the highest yield was 15.8% in 1981, and even 30 years ago the yield was still over 10%. So you would assume investors would have been piling into pension plans given they also gave you tax relief, accumulated free of taxes, and following law changes in 1981, if you died before drawing benefits and before age 75 there was no tax to pay on the value. A no-brainer, eh?
In surveys today and in 2015 it’s plain that savers put far less into their private pension plans than they should. Six years ago it was reported that 7 out of 10 retirees had amassed an average pension pot of only £72,000. A report at the time from Royal London claimed that at least a third of retirees were relying totally on state handouts and weren’t pleased about it. Seventy-two per cent wished they’d saved more and were tearing up their bucket lists.
‘As many as 90% of investors, for one reason or another, still don’t see the need to seek experienced independent advice’
What lessons had they learned too late and what were their tips to the under 40s? Start saving earlier, set proper goals, check your progress every year, and go get advice. And what did the under 40s think will encourage them to save more into a private pension? Well, 84% of them reckon if they had an incentive of £1 for every £2 they invested, added by somebody else like government or an employer, they’d definitely go for it. Oh, really?
During the 1970s, for the average taxpayer, that’s exactly what happened. During the 1980s the mark-up was slightly less. But an extra bonus during these times, and right up to the mid-1990s, is that you could invest in plans that also guaranteed a retirement income for life, well into double figures. Yet obviously these double whammy incentives failed miserably. Even for higher rate taxpayers. Astonishing.
What’s the position today, then? According to official statistics the average pension pot is under £62,000. Good grief. A recent survey from Standard Life claims that the average pension pot for its retiring policyholders is around £366,000. And what are today’s annuity rates for a married couple at 60 hoping to secure a guaranteed income increasing at 3% a year for life? It’s about 2.3%, or a starting income before tax of only £8,418. Eh? How come?
Contrary to expert views six years ago that interest rates would rise (so that it made sense to draw down higher income before locking into higher annuity rates later) gilt yields continued to fall. In April the rate fell to 0.16% . That’s an all–time low. Yikes.
Pension planning is a highly complex area. But sadly as many as 90% of investors, for one reason or another, still don’t see the need to seek experienced independent advice. And that’s why so many have no option but to tear up their bucket lists. What did my grannie used to say? “It’s just as well you don’t know what’s in front of you”. Well it doesn’t have to be that way. Go and get some good advice.