Ros Altmann: Every year about half a million people risked having to buy annuities – but fortunately were spared
Ros Altmann is a former Pensions Minister who campaigns for older people and has a seat in the House of Lords.
Pension freedom gave people over 55 more power over how they spend, save or invest their pension pots.
Baroness Altmann explains how many people were freed from buying an annuity when deals hit rock bottom, and why pensions need to be shaken up again to better meet the needs of savers now.
Retirement freedom reforms have kept millions of retirees from being stuck at historically low annuity rates, with no protection against inflation or any income for surviving spouses.
Many of the people who benefited from the changes introduced in 2015 do not have to buy annuities at rates that would have made them poorer for the rest of their lives.
Every year, around half a million people were at risk of paying annuities against the background of the Bank of England’s ongoing money printing policy – quantitative easing – which deliberately pushed long-term interest rates down.
As those rates fall, annuity costs rise and deals get worse, so retirees who trade their retirement pot for lifelong income receive far less forever.
Prior to April 2015, pension funds were allowed to require their clients to purchase an annuity from their pension fund to provide retirement income.
The investment and withdrawal plans that are now freely available and allow people to pass on hard-earned retirement savings to their loved ones instead of being gobbled up by insurers when they die were then subject to relatively rigid restrictions.
Unless people had very small or very large funds, they were forced to annuize, and the majority did not get good customer support.
There was no transparency about the risk margins or profit margins that insurers were pricing in the products, so people were stuck with a lifetime income that could have caused them to lose their capital if they died within a few years, that would never increase with the inflation and offered nothing to a surviving partner.
People were told to ‘shop around for the best rate’, but this generally just led them to find a ‘single life, level annuity’ – a single life means nothing to a spouse who outlived you, and level means no inflation protection.
This gave people a better rate, but often for the wrong product, rather than helping them get the most out of their retirement savings.
Pension freedoms have been great for many retirees in Britain, who stayed invested and avoided being locked into low annuity rates, says Ros Altmann
The pension liberties have been much criticized, but they were great for many British pensioners at a time when annuity rates plummeted due to central bank policy.
As the Bank of England’s quantitative easing program comes to an end, the outlook for both interest rates and annuities has changed.
Recent rate hikes have led to a recovery in annuity rates, which have risen about 20 percent over the past year.
This may benefit those who are now taking a different view of annuities, but people who were locked into annuities at old lower rates will not benefit. They cannot reverse or change the terms of their original annuity purchase.
But the many people who took the opportunity to use retirement freedoms instead of buying an annuity at least got a chance to keep their money invested and benefit from investment returns to help offset increases in inflation.
Those people have been given the opportunity in recent years to build a better pension fund.
They have been able to wait longer before being trapped in a rigid annuity income stream for the rest of their lives, and are now taking advantage of rising interest rates.
If their health has deteriorated, they are also better able to receive higher lifetime pensions from a limited entitlement annuity, which better reflects their likely life expectancy.
A new way of thinking is needed to also review the ‘standard funds’
UK pensions are still ripe for a new way of thinking, moving away from standard funds in which most people stay while they work and save for old age.
Many people on auto-enrollment pensions nearing retirement have been severely let down by their lifestyles or “default funds,” leading them in recent years to erroneously move from stocks and assets with higher potential returns to bonds with supposedly higher returns. low risk.
Without asking about members’ retirement intentions, their money was simply automatically moved into “safe” bonds, which plummeted in price as inflation rose and quantitative easing ended.
This approach was designed to ensure that the participant was not exposed to massive drops in their pension assets just before retirement.
But many of these products, trusted by millions of British workers and investors, had not been redesigned to reflect the pension freedoms introduced eight years ago.
It was not checked whether the pension participant actually intended to retire on the ‘target date’.
And, crucially, they were still based on the expectation that people would buy an annuity, rather than keep investing money into their retirement.
Even as it became clear that inflation was rising and interest rates should rise, most of these funds continued to convert people’s investments into bonds.
Unfortunately, the experience since 2022 has been disastrous, with many of these funds losing 20-30 percent of their value as yields on UK government bonds – known as gilts – rose and their prices collapsed.
Over the course of 2022, gilts lost 20 percent and indexed gilts more than 30 percent, while the FTSE All Share and FTSE 100 rose 1 percent (or 4.7 percent including dividends).
Yes, the FTSE 250 index for smaller companies fell nearly 20 percent, but overall the asset class of bonds with the lowest risk turned out to be riskier than once thought.
The post-quantitative easing world is unprecedented. No one knows how the tapering of bond purchases by central banks will turn out.
Many people stop paying an annuity at a certain age, can work longer and their health can deteriorate.
That is why we need innovative thinking about how savers can benefit from long-term retirement investments that do not assume a certain age at which the money is withdrawn, and ask people every year if they have certain plans with their pension fund.
This would enable new approaches to income withdrawal, individualized annuities in later life, continuing to invest well beyond state pension age, and guidance or advice for financial planning later in life.
One approach might be to divide a retirement fund into four parts, with perhaps the tax-free money for people in their 60s, and then the remaining parts invested for their 70s, 80s, and 90s — a longer look at investments.
Individual pensions that take into account the circumstances and needs of each participant are required. It’s time to rethink pensions for the modern world.
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to compromise our editorial independence.