Dr Ros Altmann, a hugely respected independent pensions policy consultant, has criticised the UK pension system for being nothing more than a giant bet on the stock market. Her recent report states that the idea that equity markets might not actually deliver over the longer term was never seriously entertained by the policymakers. Similarly, there is an equally serious issue as to the lack of understanding of how a pension fund is converted into retirement income, a pension annuity.
Dr Altmann also finds in her research that most people do not realise the real difference between their pension fund and their pension (or their pension annuity). Getting an income out of their pension fund in later life is a completely separate issue for people and the money being put into a fund cannot predict what pension annuity income they will get out later, because there are so many risks involved that can affect the outcome.
She actually concludes that pension annuities are poorly understood and the Financial Services Authority (FSA) has failed to regulate them in the consumer’s best interests. Converting a pension to an income is one of the most important milestones we find in financial planning. In fact she would argue it is top of the list of really significant lifetime financial decisions. So it is outrageous that the whole process is regulated so lightly and understood so poorly by people.
Most people end up buying lifetime pension annuities; a secure, taxable income which is paid for the rest of your life. They buy this either from their own pension fund provider, often an easy option, but a poor-value option, or on the open market from a choice of annuity providers. Pension providers are actually obliged to inform customers about the open market option, though some do bury the information in the small print of the documentation sent to their customers.
But what the pension providers rarely tell you is that a pension annuity is not your only option for converting a pension fund into a monthly retirement income, even with the best pension annuity rates. You could instead choose income drawdown (now unsecured pension), or investment-linked pension annuities. Whether these are better options will depend on your personal circumstances.
Lifetime annuities do secure you an income but they are not a no-risk option as, unless you take inflation-linking, they won’t keep pace with ongoing rising prices. Also, unless you are already suffering poor enough health to qualify for an enhanced annuity rate, an annuity doesn’t really cater to your individual personal circumstances.
