Should you still buy an annuity to guarantee you can afford the everyday spending essentials for the remaining years of your life? Photograph: Alamy<\/p>\n
We are entering a golden era of pension freedom this year, if you believe the government. But before doffing our caps to George Osborne for releasing us from the annuity jail, lets explore some of the myths already building up. <\/p>\n
Youll get free advice Watch Osbornes lips in the 19 March 2014 budget. He said that everyone will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have. But you wont. Straight after the speech, Osbornes officials began backtracking on the promise. For the 400,000 people retiring each year, it wont be advice (oh no, that would make the government liable for it) but guidance. The guidance wont actually tell you what products to buy with your pension savings. It wont be personally relevant, but at best will signpost people to where they can find real, regulated financial advice which will cost hundreds, if not thousands of pounds. <\/p>\n
As industry expert Ned Cazalet pointsout, the current regulatory regime means there is a strong danger that we end up with a two-tier nation, where the majority of retirees are effectively denied access to useful professional advice. <\/p>\n
Annuities should continue to provide a safety net income for essentials The pensions industry, staring at the catastrophic collapse of 12bn a year in sales, is madly promoting the idea that annuities still have a role to play. They say you should still buy an annuity to guarantee you can afford the everyday spending essentials for the remaining years of your life, then use drawdown for other expenditure. <\/p>\n
But as Cazalets report reveals, annuities are even more God-awful than we thought. Even though he prepared it for a pension company, Royal London, Cazalet estimates that the industry has robbed 20% from your fund for expenses. Effectively, for every 50,000 you saved over your lifetime, they have been pocketing 10,000. Of course, Cazalet doesnt use the word rob, but you see the point. <\/p>\n
Neither does he have much time for the idea that annuities leave you in profit so long as you last into your mid-80s. He reckons that flat-rate annuities (which dont go up in line with inflation) do not pay you back the money you paid in until you reach the age of 85, which is a woeful two years above current male life expectancy at age 65. Index-linked annuities make no sense at all. On his maths, they only deliver value for money if the annuitant lives to be at least 101! <\/p>\n
You are going to live a very long time, so spread the money carefully Its true, we are all living longer, men in particular. In 1971, a man aged 70 on average lived a further 9.5 years. Today, they are likely to live another 14.6 years. <\/p>\n
But how many of those additional years are spent in good health? The data suggests the first 10 years after 65 are spent in relatively good health, but after age 75 the average male will spend eight years in relatively poor health. What does this mean for pension planning? Blow it all before 75? Or keep it all back until 75 to spend on care needs? And if we are all supposed to be merrily drawing down our pension money, will we have the cognitive capacity to handle drawdown from our mid-80s onwards? The number of people suffering with dementia is expected to rise to 2 million by 2051. Oddly enough, Cazalet suggests that it may make sense to buy an annuity at age 75, notwithstanding their generally poor value, just to stop the elderly having to make financial decisions in later life. <\/p>\n
You will be able to use your pension like a bank account. Ha ha. Does anyone really think pension companies (and employers too) are in shape to deliver the new pension freedoms from 6 April? Get ready not for Pension Freedom Day but for Pension Total Chaos Day <\/p>\n
<\/p>\n
Link: <\/p>\n
Pension freedom? Its an expensive mirage<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Should you still buy an annuity to guarantee you can afford the everyday spending essentials for the remaining years of your life? Photograph: Alamy We are entering a golden era of pension freedom this year, if you believe the government Continue reading