The pension situation in the UK is pretty straightforward. We work all our lives to build up a pension pot, and then at some time before the age of 75 we have to use that money to buy an annuity that pays an agreed amount every year until we die.
You could say that an annuity is effectively a bet between the retiree and the annuity provider as to how long the annuitant will live. However, most annuities are also priced according to the cost of low-risk government bonds and corporate bonds at the time of purchase, as these are the investments that used to fund payouts. The changing bond markets can mean that retiring at the wrong time can leave you stuck with a poor pension for the rest of your life.
There are a few other options – income drawdown for example, where you keep hold of your pension pot and invest in higher risk assets while drawing down a certain amount each year – but these are widely accepted as being suitable only for certain wealthier people, working with their advisers.
Some insurance companies are now looking to revolutionise the market by offering so-called ‘variable rate annuities’ – a different type of annuity already massively popular in the US and elsewhere. Aegon have, for example, just launched their ‘Income for Life’ plan.
According to the FT: ‘VAs will provide customers with exposure to riskier but higher returning assets, such as equities, but with explicitly priced guarantees, either to protect the capital or provide a minimum level of income.’
Are you prepared to take a gamble with your pension fund ? How much risk would you prepared to take? Do you trust the insurance companies that provide these annuities to offer a fair deal? How would you manage if it all went wrong?
On a wider point, should the forced annuity purchase system in the UK be scrapped? Are we savvy enough now to take control of our pension finances?