Retirement

The Conservatives are claiming that, based upon figures they have obtained from the Office of National Statistics, one million fewer workers are members of employer pension schemes than ten years ago.  Their argument is that this is due to the present Governments policies, principally the removal of a pension funds ability to reclaim the tax credit on dividend payments.

The Tories are, of course, out to make political capital and this is by no means a recent trend but there is a serious point here.  Employer sponsored pension schemes were, and still are, a valuable source of retirement income and many years of, supposedly, supportive Government policy have done nothing to halt their decline.  My own view is that no cause and effect has been proven between removal of the tax relief and reducing membership (or, perhaps, more accurately, availability) of these schemes, more of a problem has been the increasing protection afforded to members.

Final Salary Schemes now afford statutory protection to their members, meaning that their benefits are, in effect, underwritten by taxpayers.  There is a bit more to it than that but that is the gist.  Protection, of course, comes at a price and it seems that the price for most of us is no scheme.  The dwindling band of final salary scheme members sail off into the sunset secure in the knowledge that the rest of us are guaranteeing their future whilst we of the less fortunate majority are left to rue our loss.  It is a shame that we are turning into a nation of haves and have nots when it comes to pensions and another example of the unforeseen consequences of well meaning responses by politicians to call to ‘do something’.

It looks as if future pensioners will find it harder than ever to buy an annuity which provides sensible value for money.  As with many things in life, there are a number of forces pulling in opposite directions with unforeseeable consequences.

For those with investment based pension schemes, whether company sponsored or not, the choice on retirement is to buy an annuity or draw an income directly from the investments in the pension scheme.  Buying an annuity provides certainty of income whilst drawing on the investments allows greater flexibility with the possibility of a higher level of income but with the continued investment risk.  There are many reasons why one or other route may be the most appropriate decision for an individual but the government seems resolutely wedded to the idea that annuities are better.  Current rules seem to favour those buying an annuity as the government seems reluctant to let go of the control it exercises.

Not for the first time, however, it seems that the market could scupper government plans.  The great thing about an annuity (supposedly) is that mortality is pooled, i.e., no one is exposed to their own life span.  If you happen to live for longer than average, you will not have had to have a lower income or have run the danger of running out of money because those who died early will have subsidised you.  Whether or not you are happy with this cross-subsidy is another matter.  If you only live for a few years in retirement, your family may not feel that they or you have received value for money.

The purchase of annuities, though, is becoming increasingly exposed to competitive forces and the regulator is encouraging this for obvious reasons.  This means that the insurance companies who sell annuities are having to create a competitive advantage and to do so they are slicing and dicing the pooled mortality to give some a much better deal.  At the moment, they mainly do this by allowing some with a health problem or dangerous lifestyle to opt out and get a better rate, i.e., receive more money quicker because they will not be around for long.  Insurers are now starting to assess people on the basis of where they live; we all know that those in Surrey outlive those in Glasgow.

the next step is to take into account former occupation to a greater degree and, perhaps, genetic testing.  Great if you are not going to be around for long but bad news for the wealthier, healthier retiree.

Buying an annuity is already a fraught and risky business; what is your view of future inflation for the rest of your life, are you likely to have a dependent when you die in thirty years, etc?  It is set to be a good deal more fraught in the future.  How then will tomorrow's retirees view the seemingly arbitrary restrictions on how they draw pension income?  My guess is, not very positively.  The government has proved fairly unsuccessful at modelling people's behaviour, partly because it is not very good at determining the best type of behaviour and partly because people are a good deal less persuaded by the merits of it than the government assumes.  It could be that we will see the reworking of pension rules over the coming years and tomorrow's pensioners will have to get used to the idea of drawing an income form an investment portfolio with all of the attendant risk and effort required to do it successfully.

In new research published by the insurer Skandia, only 3% of people retired because they could afford not to work, half were forced to retire through ill health.  For those around retirement age, the majority said that they had money worries.  19%% retired because they had had enough of work, 10% were given an early retirement package and 8% were made redundant.  Only 7% said they had retired when they did because they had reached state pension age.

Most people assume that they will dictate when they retire but, in reality, most will not have control over the timing.