Here’s an interesting statistic. According to Fidelity, annuity sales are down 50% this year. You might think this isn’t that surprising. After all, we heard in the last budget that there were to be huge changes to the pension system. And a paper this week from the new financial secretary to the Treasury, David Gauke – Freedom and Choice in Pensions – effectively called time on the old annuity system in the UK. From next year, everyone should be able to withdraw money from their pension after the age of 55 as and when they like (subject to income tax on anything beyond the first 25%).
But to me, the surprise isn’t that the numbers have fallen – it is how little they have fallen. Given what bad value annuities are today, and that a world of pension possibilities is opening up, what on earth are those buying annuities thinking? More importantly, what are the people selling them these annuities thinking? I won’t follow this train of thought too far – just to note that these sales of high-margin but not-very-suitable products inside a last-ditch time frame are mildly reminiscent of the jump in high-commission products sold to unsuspecting investors just before the Retail Distribution Review (which banned commission payments) was introduced. That’s all.
On to happier thoughts. We have always loathed the annuity system, not because the concept of an annuity is necessarily a bad one, but because the dodgy-dealing UK financial industry used their existence as yet another excuse to introduce commission-grabbing middle men and competition-destroying small print. So the fact that the government now seems to believe that most of us, with a bit of state-sponsored guidance, are capable of figuring out our own finances in retirement, is good news.
Even better is the ‘just-in-time’ way in which they plan to deliver that guidance. Endless research shows that teaching people about personal finance too early is pointless. Just as I have forgotten the periodic table, anyone taught about money in school has wiped their memory of every bit of pensions-related information by the time they actually need it. So teaching people about pension options exactly when they need to know about pension options is an excellent idea.
It might even, as pensions expert Ros Altmann puts it, “open the door for new products as well as improving financial literacy”. What new products? My hope is that we will see better versions of old products – reasonably priced, time-limited annuities perhaps; with-profits funds that are clear about their payout methodology; or just more well-managed balanced funds that provide a regular income service.
We’ll keep you updated on the best options as they appear – I’ve seen a few good examples of the latter recently. But if you are already managing your own money and you are looking for stock or fund ideas, you will find plenty in our Roundtable and our funds tips.