How I caught a good pension... by mistake

Hi How do you get an annuity which pays 9.4% on 56K

I would endorse this advice. With profits endowments have had a bad press in recent years but I (recklessly?) decided to save £4 a month with a with-profits Co-op endowment back in 1968. In total I paid in £2000 when my endowment matured recently and it paid out over £24,000 on maturity.

However, there seemed to be no transparency during the term and unless I asked for a surrender value (which is always somewhat lower than actual worth) the customer has little information on the likely final value. This is typical arrogance of financial services. Plenty of charts, projections, advice at the point of sale but then just an anual update of gobbledegook on reversionary bonus, terminal bonus, fund statistics etc., until a number is pulled out of the hat and the mystified customer gets a cheque!

Most annuities are paying out between 5-6% eg 100K £5-6,000 a year

I know a person who will obtain an anuity of 10% on retiment at 60 in a with profits fund from Sun Alliance.

The person is a client of mine.

Chris

This is the guarantee of 9.3% on the pension pot which is the gold nuggett of this particular pension

My Wife and I took out two endowment policies to raise a £32k mortgage in 1983, to buy a property for £46k. 25 years later, the policies( eventually ended up with Aviva ) matured at £47k and we sold the property two years ago for £370k and it's understandable why us babyboomers are given a bad press, but hey, we worked hard and had a prudent lifestyle and now have reaped the rewards. Bye the way, we were helped enormously by the absolutely fantastic Virgin one account. Slightly more expensive, but great flexibility.

Chris I would recommend going back in time to the 80's and buying a retirement annuity contract (the pre 88 personal pension) which often has guaranteed rates involved. Bar that no chance.

Guaranteed annuity rates were not without cost and many rates didn't come into play until as late as age 75. If the pension saver died before taking benefits, the return on death could be as low as just the return of premiums paid. Yes, with profit pensions can work out well for some but definitely not in all cases.

I have a friend with a similar policy with a guaranteed annuity rate of 9.3% which is brilliant. Reading the small print shows that the annuity is single life and level term. There is no provision for a widow or guaranteed length of time the annuity would be paid for. So, the worst scenario is that he could take the annuity and die soon after when all would be lost. He could try and mitigate these circumstances by taking out a life policy to cover in part or full the income from the annuity. At 65 that could be expensive.

Congratulations on receiving a good deal from your investments. I have been "investing" in a Norwch Union endowment policvy (now with Aviva) for nearly 25 years and the annual rate of return on the underlying fund so far is less than 4% a year, just beating the average annual rate of inflation in that time. Terrible. Can I squeeze a sensible explanation out of Aviva as to why, exactly, that has happened? No.

Antonio: You are still paying in to your policy. Do you know what the final bonus will be. When that's added, it could make a huge difference.

Hi, I have been paying in £100 a month for the past 24 years. I expect, on the basis of what Aviva tell me, to receive about £55,000 including a final bonus and the promised compensation for the shortfall (their endowment promise) which was set at £10,000 about 12 years ago. But the company's figures show that the underlying fund has (if I remember correctly) achieived an annual return of less than 4% a year. Endowment "promise" aside, that is just terrible.

That should be "achieved". Contributions to this site could do with a spell checker!

Rod I think my 9.3% is on the same single life basis as your friend. I had a long chat a couple of years ago with supervisor at the Pru in India who explained it all really well but it is incredibly complicated and even the annual statements are hard to follow. Richard John Brydon I agree the terminal bonus can make a huge difference but it seems such a lottery to me. Quite recently the terminal bonus on my policy in one year was just 1%. Clarkkent I agree with you that with profits gets a bad press and often justifiably so but like many things the reality is more complex than the headlines and many people seem to have done very well out of them.

Not such an uncommon story - you shouldn't believe all that you read in the Press Lawrence.

Well done Lawrence!! Many would kill for a 9.3% return guarrantee.

Your luck was in no small part due to ending up with Prudential. I have had a straight with profit investment in their fund since 1998 and am more than happy with it.

I take an annual income of 5% pa and found at the last valuation that it had still managed to increase.

I use this fund both for a source of income and as an hedge against my main personal share portfolio.

Overall for me it has returned a compound 8% and I am more than happy with this as it has a good level of investment in the for main asset classes ( most others have sacrificed equities for low value fixed interest).

As over the last 100 years the UK market has returned a net 5.25% or so this is a very good return.

The whole thing depends on your attitude to risk. I decided that having been a very sensible boy all my working life and always taking the safe financial route, that I would throw caution to the wind and get into shares in a big way. So I got stuck into the Alternative Investment Market and hit it just at the right time.

I ended up running my drawdown SIPP, a share trading account and two share ISAs ( mainly duel registered companies) and gained between 50% to 140% on my portfolios. Having spent the profits altering our house among other things, I am now treading water and waiting for the slump to end, then I plan to do it all again.

As I say, it all depends on your appetite for risk. If you are happy to let somebody else handle your money and gain 9% then go for it, personally, I am not and even though my portfolios are down between -18% to -40% at the moment, I would never have acheived those kind of returns If I had placed my money with a company managed investment fund.

No one has mentioned the fact that this sounds just like the Equitable Life debacle where there was a large group of clients with "guaranteed" high value annuities. The problem was that Equitable discovered that they couldnt afford to pay them and after a House of Lords ruling that they must, Equitable Life effectively went bust and lots of people lost money. That was 15 years ago and they are still trying to sort out the mess.

So why is this different?

Lord Treves, then CEO of Equitable Life said that the House of Lords judgement in 2000 (from memory) was "bollocks" - and I was required to read that in front of a lady judge some time later.

The winners in the GAR debacle are stealing - maybe too strong a word because most don't know (and even if they did, many wouldn't care) - that they are taking funds from those without the benefit. WP funds are collective investments. Fortunately, no other fund allows some policyholders to take more than their fair shares from the fund, but that is what has destroyed WP funds as an investment.

I have recently sent this to Lord Prescott - I hope he doesn't mind my sharing this with you:

Dear Lord Prescott

I see that you have been complaining about the Press Complaints Commission. I would like to tell you about my dealings with them.

I was campaigning on behalf of Equitable Life in their dispute with holders of GAR (Guaranteed Annuity Rate) pension policies. I used to have lots on my website about the dispute but it has all been deleted long ago.

From memory, before March 1988, the Inland Revenue required those providing pension savings schemes to provide this GAR so that the saver wouldn't get 'ripped off' when he retired and converted his policy into an annuity. In March 1988, Mrs Thatcher's government introduced the "Open Market Option" whereby anyone retiring could take their 'pot of gold' and look at rates offered by other annuity providers. The government argued that the OMO would give policyholders the security they needed and dropped the requirement for a GAR. I think that all insurance companies simply dropped the GAR from their policies and continued to sell new policies to new savers on otherwise similar terms.

All was well until interest rates fell. so that the Current Annuity Rate (CAR) fell below the GAR. Equitable Life argued that the non-guaranteed final bonus was, indeed, not guaranteed and cut the final bonus for GAR policyholders so that all policyholders received the benefits of their shares of the collective with-profits fund. The GARs wanted both the full final bonus plus the full GAR. They wanted more than their shares of the fund, thereby depriving non-GAR policyholders of some of the funds that they had paid for.

My argument was that if later policyholders had been warned that they would be required to pay for preferential terms for earlier policyholders, then there would have been no later policyholders and the GAR policyholders would have had to share in assets bought by those policyholders. That is what Equitable Life was attempting to do by lowering the final bonus for those demanding the Guaranteed Annuity Rates - something like 9% or more when the Current Annuity Rate was around 6%. Clearly, providing a fund that would pay 9%/year cost Equitable Life far more than a fund that could pay 6%. If that is what had been intended, then later policyholders were mis-sold their policies, and it could have amounted to fraud.

As we know, the case went through the law courts to the House of Lords, where Lord Woolf, then the lead judge, ruled that all policyholders should get their fair shares from the fund, but that the GAR policyholders should get more! I wrote on my website that this was an Alice-in-Wonderland judgement - that comment cost shareholders of a company of which I was a director £250,000 when we sued former directors for mis-using the company's assets.

During the time that this dispute was progressing through the courts, I wrote nearly 100 letters and emails to the Daily Telegraph who were supporting the GAR corner. I believe that they painted a partisan and unfair picture in their reporting.

I wrote to the Press Complaints Commission with cuttings from 18 months or two years. They replied that they could only investigate reports in the past month, and that those I complained about were fair comment.

As I am sure you know, this debacle destroyed Equitable Life - they could no longer sell policies once new policyholders had to be told about the GAR liability - and is costing taxpayers up to £1.5 BILLION in compensation for Equitable Life policyholders.

My view is that if the press had reported a balanced and fair story, then the outcome may well have been very different.

Yours sincerely

David Stonebanks

David is right - what occurred at Equitable was a scandal which the auditors and the Regulator should have stamped on at the time - and later the government should have acknowledged and made amends...

Those left out there with such high guarantees should think themselves very lucky - its others who will pay

I am afraid that I have to disagree with David re Equitable life. The whole point of the GAR was to mitigate against the effect of lower annuity rates. Annuity rates duly fell but EL tried to undo the guarantee by discriminating with the final bonus. All companies were affected yet no others tried to avoid their GAR liability or went bust. They either had sufficient reserves to cover GAR, which notably EL did not, or they took steps to segregate the GAR 'estate' from the non GAR 'estate, whereas EL took none.

Although the original ruling was about Equitable Life, it applies to all WP funds so all new investors are required to subsidise those fortunate and lucky enough to have started their policies before the Open Market Option was introduced.

The earlier Guaranteed Annuity Rate was intended to prevent the pension provider from 'ripping off' the saver when he wanted to retire. Dropping the requirement wasn't intended to enable GAR policyholders to 'rip off' their fellow WP fund members, but that is the outcome.

It stinks.

Amazing. I had the reverse experience with Standard Life. I put a lump sum in their "with profits" endowment. I foolishly thought with profit policies increased each year. No they don't at least not Scottish Life ones, or at least not at that time. When I was coming up to retirement I asked them what "pot" I had. They told me the sum and so the next year I asked them how much it had increased. The answer was that it had DECREASED, and quite a bit. So I asked how much did they expect it to increase by the following year. The answer was that it would increase quite nicely. Guess what it was down again the following year and the year after, even though each time I asked I was told it would go up.When they realized I was furious Standard Life Life told me that the answers they gave to me were in "compliance" with Government requirements! FSA were no help at all. Their answer was that an Endowment provider can more or less do what they want!

The first value that you were given must have included the final bonus that was applicable in that year. The fact that in the following year the surrender valuation was lower must reflect a lower final bonus applicable. Final bonuses have never been guaranteed.

Barney - "Endowment provider can more or less do what they want!" - no they can't. The Law Lords ruled that they had to pay those with GAR policies more than they had paid for, so had to take it from you. Endowment policyholders were in the dubious position of having to underwrite GAR policyholders while never being able to benefit.

Stanley Kirk - "All companies were affected yet no others tried to avoid their GAR liability or went bust. They either had sufficient reserves to cover GAR, which notably EL did not, or they took steps to segregate the GAR 'estate' from the non GAR 'estate, whereas EL took none."

Once the House of Lords had made their ruling, all the others had to comply - which they did by taking funds from other members of the collective with-profits fund.

Equitable Life got into trouble because they paid full value to those retiring or surrendering while the others retained lots of free assets in their fund - enough for AXA to pinch a large share for shareholders. The fellow behind that shameful deed, whose name escapes me, went to the Prudential intending to do the same again for their shareholders - unfortunately, the Law Lords beat him to it and lumbered the WP fund with this massive liability they hadn't expected.

Another reason Equitable Life got into trouble was that they told policyholders how much they could expect as a final bonus. No one else did, and it meant that Equitable Life GAR policyholders were miffed to find that they had to pay for their own annuity - until the HoL ruled that others would underwrite the extra cost.

It stank then and it still does.

1: The director who masterminded the AXA heist was Mark Wood.

2: Stanley Kirk - after the Equitable Life disaster, the FSA ruled that companies had to "treat customers fairly". They ruled that any policyholders who had preferential terms in their policies must pay for them. Never again, would one group of policyholders have to pay for benefits enjoyed by others but it didn't help those already caught up on the wrong side of the House of Lords ruling. Many who were expecting their endowment policies to repay their mortgage debt on maturity suffered shorfalls.

David, nobody dispassionately reviewing the Equitable Life Saga can ignore the fact that GARs had a much more severe effect on them than any other company. Why was that? The plain fact is that EL was a financially weak company after years of maximising bonuses at the expense of reserves. This was a quite deliberate strategy which yielded acres of good Press to fuel sales. A number of IFA firms, especially the nationals who had the depth of pocket to fund proper due diligence on life companies, consistently drew attention to this and were consistently dismissed by the Press as suffering from 'sour grapes' because of the EL 'nil commission' policy, even where they were purely fee charging IFAs. I suspect the press might have been harsh after they realised that they had been duped by EL propaganda for years and that the Emperor, literally, 'had no clothes'.

I should have added that it must have been very difficult to find the necessary legal resources to power the court cases, considering the very large number of members of the legal profession (especially judges) who had Equitable Life plans, not to mention MPs and even the Houses of Parliament AVC scheme.

Barney, I'm confused after reading your posting. Was it Standard Life or Scottish Life? Was it an endowment (implies a regular premium plan)? Or was it a bond (you mention 'lump sum')? Or was it a pension (you mention 'retirement')?

Each of these has different implications. I suggest you get some professional advice on exactly what you have and I suspect the answer will not be as bad as you fear.

To get back to the original point of this thread, many WP plans have produced good results, depending on company and timing. These are not as rare as Lawrence implies. That is not to say that WP (with all of the inherent complication, obscurity and cross subsidy) is or ever was a good idea, merely that those who react to typically negative Press comment by disposing of their plans can frequently be tossing out the baby with the bath water.

Stanley - Equitable Life was a mutual society - no outside investors to make up any shortfalls or to cream off profits. All of the profits made (after expenses) went back to policyholders.

There was only one fund. If one group took more than the shares that they had paid for, then the extra cost could only be taken from the one fund. 25% of policyholders had GARs, the rest didn't. The GARs paid for 25% of the cost of the GARs, the rest paid for 75% of the cost.

Only Equitable Life told policyholders what their final non-guaranteed bonus was likely to be. Only Equitable Life policyholders were able to complain when their final bonus was lowered to give all policyholders their full asset shares from the fund.

All Equitable Life policyholders had EMAG to look after them impartially - impartially as you could expect when the leading figures had large GAR policies to protect.

It stank then and it still does.

Stanley from 1707: "even the Houses of Parliament AVC scheme."

I had an Equitable Life AVC policy started while Equitable Life were offering policies with GARs to new pension policyholders.

AVC policyholders along with endowment policyholders were in the privileged position of having to pay for the cost of the GAR policies while never being able to benefit. AVC policyholders weren't members either so not entitled to vote or to put themselves up for election as a director.

Heads they lost, tails they lost.

I had Equitable AVCs with my private sector DB pension scheme and had the benefit of GARs in that when the initial EL crisis unfolded everyone had their AVC pots reduced by about 17% but then those with GAR had about the same amount reinstated so I ended up not far off what I was expecting (this cash was then used to buy extra pension in my company scheme rather than an EL annuity). I believe that I am still due something from the government compensation but I will believe that if I ever see it.

I had an Equitable AVC with a teacher's pension. I started that around the same time as my wife who transfered a fund from another employer.

When the bubble blew, I phoned EL asking why my wife had a GAR and mine didn't, I was told that the GAR had no value, so I suggested that they include it in my policy - I didn't get it. I was told that no EL AVC fundholder had a GAR in their policy.

DG Stonebanks

Looking at my AVC documentation it seems that GARs only applied to members who started AVCs in the EL with profit scheme before 1st March 1993. In 2002 I received a note saying "GARs have been removed but in compensation, GAR policy values have been increased by an average of 17.5% (ranging from 16.5% to 20.4% depending upon age)" . This information was provided by my employer's pension fund and not directly from EL who probably wouldn't talk to me direct anyway. When I retired in 2003 the EL AVC value was used to provide an increased DB pension.

I started this AVC in March 1988. It did not have a GAR. As it happens, I took early retirement at the end of August 1992 but didn't claim my EL AVC until after the HoL judgement on 2001. I had been advised that the fund was worth £x.

Originally, EL offered me the fund value at August 1992 (about 40% of x) with an annuity rate current in 2001 - the exact opposite of what the GARs had been demanding. After much haggling, I eventually got the 1992 fund value + annuity rate at 1992, plus a refund of contributions between 1992 and 2001.

Both my wife and I are happy with our returns from EL, but I still think that those who organised the GAR legal action should be ashamed of themselves.

If I had gone into a restaurant with a GAR policyholder and we had both ordered breakfasts, he would be rightly upset if I then leant across and pinched the fried egg off his plate. I doubt if he would have been placated by my saying "Ah, but I have a secret deal with the management that gives me the right to pinch your egg". That's what the GARs are doing to their fellow members every day until they die, and they do it with a clear conscience. Amazing.

David, you clearly feel very passionately about your experience as an EL policyholder, yet your blame seems to fall on other policyholders (who had GAR) rather than the company.

Your 'egg' analogy falls down because under the contractual arrangements for life policies, the egg belongs to the company, not you (as it would do in, for instance, a unit rust or OEIC) and it is up to them to decide how to 'distribute' it within the discretion allowed to them under the terms of the contract. They tried to give it you but the courts decided it was not yours within the terms of the contracts.

No other life company even tried the 'final bonus' trick as a way of avoiding GAR liabilities - you would expect some consensus if this approach had any legal merit.

Other companies adopted a variety of methods for putting a lid on GAR liabilities, including ring fencing the GAR policyholder assets in different funds (by creating new funds for new policyholders) with asset allocation matched to the guarantees - i.e. high fixed interest content and much lower bonus prospects going forward for GAR policyholders. There is no law that says that a company can have only one with profits fund.The EL board took a gamble that their unique final bonus policy would do the trick instead - they were wrong.

Other background facts that you may not be aware of re EL.

EL was one of many mutuals and like all of them, this meant that the board/management was untroubled by any significant external supervision (aka shareholders).

Circa 80* of the resources of a life company are there purely to attract and administer new business - the staff therefore have a very strong interest in maintaining that new business flow.

EL recovered maginificently from a near death experience of the loss of most of their new business in the early 1970's when the Federated Universities Superannuation Scheme (one of the biggest pension schemes in the country) changed its investment policy. London Life was the other company badly affected by this.

EL did this by hiring in a number of very successful sales people (one of whom was subsequently promoted to the top job at EL) from a Canadian Life Company (noted for poor results and high pressure sales techniques) and reinventing themselves as a direct sales force with a very generous 'bonus' rate to salesmen. For quite a while the several hundred strong EL sales steam was the elite salesforce (meaured by earnings) in the industry.

The advertising pitch which attracted all that business was 'no commission' and 'top of the table payouts' for their With Profit policies. Maximum payouts were achieved by keeping reserves to minimum levels, not superior investment performance (EL unit linked funds were distinctly mediocre). For nearly 25 years EL was also the darling of the Press who fell for the sales pitch and produced literally acres of articles which the salesmen used as sales aids. Lack of reserves was the reason why EL was unable to weather the GAR storm - this was no accident but deliberate management policy as a new business driver.

There's a good book in the EL saga at some time since “Those who fail to learn from history are doomed to repeat it.”

Thanks for your response Stanley

"Your 'egg' analogy falls down because under the contractual arrangements for life policies, the egg belongs to the company, not you (as it would do in, for instance, a unit trust or OEIC) and it is up to them to decide how to 'distribute' it within the discretion allowed to them under the terms of the contract."

So are you saying that if the restaurant had given me the egg that you had been expecting, that that would have been ok, because it was still theirs until it had been dished up. The fact that you might have paid for the egg doesn't seem to matter,

True, you wouldn't go back there, but this a short term, immediate transaction whereas the non-GARs only found out that that they were being short-changed after contributing for many years.

MY FSAVC policy included "Your voluntary contributions towards retirement benefits are credited to an individual account in your own name. Each contribution secures a slice of the fund which the Society guarantees to pay at the normal retirement age in your main pension scheme rules.

"Bonuses are then added to each slice of the fund according to the investment experience of the Society from time to time. Once declared, those bonuses become part of the guaranteed fund. A final bonus is also currently paid at retirement, and this further increases the fund available."

There was nothing in there to warn that some of my fund might be pinched to pay for preferential terms for others. I always assumed that my policy was typical. The GARs were mis-sold and should have been entitled to compensation for the failure to disclose the GAR risk.

"No other life company even tried the 'final bonus' trick as a way of avoiding GAR liabilities - you would expect some consensus if this approach had any legal merit."

I understand that EL had had clearance for this approach from the FSA and the regulator and that they won one of the rounds of the court battle.

I used to get Money Management magazine and I remember someone saying "would an IFA be happy recommending a fund with healthy free assets knowing that they could only have got into that position by taking (underpaying, robbing, short-changing, take your pick) from maturing policyholders". It's all very well investing in a company with high free assets but not much benefit if they were unlikely to give any of that to new investors.

I remember one year that the Pru, Legal & Gen, and AXA had strong free assets in their WP fund, yet the Pru, L&G, and AXA were among the lowest 25% maturity values for 15, 20, and 25 year policies, while the Pru were the lowest of all 40 companies listed for 20 year terms.

"Other companies adopted a variety of methods for putting a lid on GAR liabilities, including ring fencing the GAR policyholder assets in different funds (by creating new funds for new policyholders) with asset allocation matched to the guarantees - i.e. high fixed interest content and much lower bonus prospects going forward for GAR policyholders."

Certainly, many companies did create new funds for new policyholders after the HoL judgement, they couldn't expect new investors to subsidise others with preferential terms after the cat was out of the bag, but my understanding was that most had enough in free assets to disguise the shortfall suffered by existing non-GARs and endowment policyholders.

You say that a fund with "high fixed interest content and much lower bonus prospects going forward for GAR policyholders." would have been acceptable. Would this have achieved a higher payout for the GARs than EL were offering. I am not convinced.

I often wondered why other companies didn't come to EL's defence early in the legal action. If they had written supporting EL then public opinion may have been swayed, but were they really pleased to see a strong competitor destroyed? We'll never know.

Stanley - "EL was one of many mutuals and like all of them, this meant that the board/management was untroubled by any significant external supervision (aka shareholders)."

Many years ago, I started investing in "2nd-hand" WP endowment policies. I was just one of five people who wrote to the High Court objecting to AXA's theft from their WP fund for shareholders. I feared that if they got away with it then other proprietary companies would do the same. They got approval for it, and understand that the Pru and Legal & Gen had been talking to the FSA about "re-attribution" of some of the free assets in their WP funds.

I was an outspoken contributor to several EL discussion boards at the time.

Some time after the EL deal had been confirmed, Frank Field, MP, said on BBC's Working Lunch TV programme that he was looking at "orphan assets" to help to solve financial problems elsewhere.

Knowing that AXA had stolen WP funds for shareholders with FSA and High Court approval, GARs were stealing from their fellow WP members with FSA and High Court approval, I thought that I had better get in and take my Standard Life shares before anyone else pinched them so I started a campaign to get Std Life to demutualise. It took a couple of years, but the company did eventually float and I did get a few shares.

After I had started, I heard that Frank Field meant "unclaimed assets" - bank accounts and insurance policies where the owners and beneficiaries couldn't be traced.

Another point that annoyed me was that I was paying my endowment premiums (premia?) out of taxed income while those saving in a pension shell were getting tax relief. Someone getting 50% discount on a £1 of assets could expect 18.6%/year return on their net investment in a policy with a 9.3% guaranteed rate - and more with fund growth - and they wanted to take some of my savings to get even more. I have always thought that this was outrageous.

Perhaps I should have added "in my view":

"Knowing that AXA had stolen WP funds for shareholders with FSA and High Court approval, in my view GARs were stealing from their fellow WP members with FSA and High Court approval, I thought that I had better get in and take my Standard Life shares before anyone else pinched them so I started a campaign to get Std Life to demutualise. It took a couple of years, but the company did eventually float and I did get a few shares.

You win some and you lose some.

My wife had a GAR pension policy. I had a non-GAR pension policy. Between us, we had 40 2nd-hand life policies as investments.

We won one, and lost 41 :-(

At least you still have your Teacher's pension.

Yes - and it wouldn't be as generous for those coming up to retirement now.

Our generation have much to be grateful for - we have missed conscription and major wars, and we have benefited tremendously from inflation. Regretably, we have made life much more difficult for our children and grandchildren.