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Pensions risk 'unravelling' due to freedom reforms

Without compulsion to buy an annuity the pension system is in danger of falling into a black hole, according to a report for Labour.

Pensions risk 'unravelling' due to freedom reforms

Last year's pension freedom reforms risk ‘unravelling’ the pension system as retirees are no longer forced to secure a retirement income, a review for the Labour party has warned.

The Independent Review of Retirement Income, commissioned by Labour two years ago, argues that scrapping the requirement to buy an annuity with a pension pension pot at retirement has removed the reason for saving into a pension in the first place.

Pensions are precious

David Blake (pictured below), chairman of the review and director at the Pensions Institute at Cass Business School, said a ‘national narrative’ around what a good retirement looks like needed to be established.

‘Without this, people’s aversion to annuitisation combined with their willingness to pay highly for flexibility and guarantees could leave them worse off than if they purchased an annuity to begin with,’ he said.

‘This is a significant challenge. But it is one that is well worth the effort because, as the pensions minister Ros Altmann says: "pensions are precious".’

The report, states the primary purpose of a pension scheme ‘is to provide an income in retirement for however long the scheme member lives – that is, it will not run out of money before the member dies’.

To that end the ‘unifying thread’ that used to run through pensions was ‘the requirement to annuitise enough pension wealth, at the appropriate age, to provide an adequate lifelong income in retirement when combined with the state pension – which is the rationale for establishing a private-sector pension scheme in the first place’.

Honey pot for thieves

However, the report goes on to say that when annuities become optional ‘That unifying thread is no longer present and there is a real danger that the pension system begins to unravel’.

‘At best, it becomes a tax-favoured agreement for operating a multi-purpose spending pot – once the money has been spent for one purpose, it cannot be spent on another,’ said Blake in the report.

He added that at worst it becomes a ‘honey pot for thieves and other opportunists’.

Adding to the problems pensions face is the lack of understanding around how to generate a retirement income.

The report noted that private sector employees are being auto-enrolled into pension schemes and that the success of the scheme is based on ‘member inertia’ – in other words it relies on people being too lazy to opt out. However, when they reach retirement they are then presented with a plethora of retirement income choices which they are then expected to navigate on their own – and the success of which is ‘predicated on the ability of members to make informed decisions’.

‘If a large group of people cannot understand the risks they face, they should not be expected to manage these themselves,’ said Blake in the report.

‘Instead, if there are well designed and regulated schemes which use retirement income products that manage these risks in the most efficient and cost-effective way, it might be possible to nudge or default savers towards one of these schemes.’

'Safe harbour' needed

The report recommended the development of ‘safe harbour products’ that would provide access to pension funds, inflation protection ‘either directly or through investment performance’, and ‘longevity insurance’ to ensure the money lasts.

It said that currently no product is offering this mix for retirees and that individual products may not be the answer but instead a ‘large-scale decumulation scheme’ may be the answer - an idea which has been floated by the National Employment Savings Trust.

‘[Large-scale decumulaion schemes] have the potential to be much cheaper and deliver more consistent results than conventional individual drawdown and annuity products, due to: economies of scale, trustee oversight, the use of a well-designed institutionally-managed fund, and the potential for the bulk purchase of members’ annuities,’ said the report.

In particular ‘middle Britain’ with pension pots of between £30,000 and £100,000 should be encouraged to ‘use a retirement income plan that involves a simple decision tree with a limited set of pathways’, including annuities, drawdown and longevity insurance.

These pathways would point the member towards the best products for their needs, with the aim being a ‘simple solution’ that is ‘good enough’ for those who do not want the responsibility of making financial decisions themselves.

Jim Boyd of insurer Partnership said leaving retirees to fend for themselves in retirement ‘may place an unreasonable burden’ on them as ‘one wrong choice can have severe consequences – and mean that an individual may run out of money before they die – or unnecessarily live in poverty’.

‘A set of safe harbour products would see more people achieving desirable outcomes,’ he said.

18 comments so far. Why not have your say?


Mar 02, 2016 at 14:59

My "aversion to annuitisation" is driven by one thing and one thing alone - the war on savers being pursued by Western governments that has seen annuity yields drop to a fraction of their former values.

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Mar 02, 2016 at 15:35

My own "aversion to annuitisation" comes from having had to buy an annuity which will give a 2% after tax IRR If I live to 100, then seeing a news comment that the insurers make between 8% and 15% from providing them.

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Law Man

Mar 02, 2016 at 15:59

Inevitably this Citywire article has little space in which to summarise numerous complicated aspects.

The 'pension freedoms' are a boon for those of us (1) with a sufficiently large final fund: say £200,000 +; and (2) the sophistication to understand the options.

For many people retiring at c. 65, an annuity probably IS the best choice; appalling though the current rates are.

The cost of an IFA will deter most. I hope the insurance companies/ scheme managers will be able to offer simple off the shelf options at no cost. The default option could be an annuity (with open market purchase) unless the saver deliberately chooses another.

The report mentions inflation protection: an RPI linked annuity would be at a very low rate. 'Longevity insurance': there would be a cost for this which the saver's pension fund would have to bear.

As regards "honey pots for thieves", this demands improved regulation with vigorous prosecution and punishment.

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Mar 02, 2016 at 16:03

Oh no... they will use pension to buy a Lambo.

They will spend it all and be skint.

Thieves will snatch it from them.

Clearly these old fogies need protecting from themselves. Perhaps we should just give all our pension pots to government and trust them to look after us in old age......which now wont start until 76.

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nick rowe

Mar 02, 2016 at 16:26

Pensions cost too much to administer for small pots any income gain is taken up by the pension companies.The amount left to actually buy an annuity will be insignificant and a rotten buy.

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Keith Hilton

Mar 02, 2016 at 16:31

"...scrapping the requirement to buy an annuity with a pension pot at retirement has removed the reason for saving into a pension in the first place." - REALLY!!!

The article contains some good points, which are worthy of further discussion, but tarnished by politically motivated dogma.

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Andrew R Bedford

Mar 02, 2016 at 17:45

And if Gordon Brown hadn't raided our pensions in 1997 we'd all be much better off now!

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Mar 03, 2016 at 08:55

Yup cost of advice - just paid for pension 'advice' prior to being made redundant / early (54) retirement. 1st quote £7k! Went with the still expensive £2.5k option and got confirmation of what I pretty much knew anyway but it was a nice glossy folder from the well known company and it convinced the missus I was right all along.

What irked me was at the end of the initial meeting he wanted to extend the 'advice' into IHT. I had not asked for that and was hesitant and agreed to some form of high level view which, in the end, amounted to a sales pitch for an end of life policy to pay the forecast £550k IHT for my kids. It would cost £4k pa and earn the advisor £5k. Not a single question about our intentions in retirement re assets or any other IHT avoidance strategy. The report and follow up meeting were embarassingly focussed on getting me to agree to this.

Just another nail in the coffin of paid advice market.

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Anonymous 1 needed this 'off the record'

Mar 06, 2016 at 11:01

"He added that at worst it becomes a ‘honey pot for thieves and other opportunists’."

Or Labour politicians as they are otherwise known.

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Mar 06, 2016 at 12:14

checking HL's best annuity rates here:

an average post code (your life exectancy depends/varies on the post code you were born in here:

You need to downloada spreadsheet to see your own detail, but using the overall tab for England&Wales, the average life expectancy of males at age 65 (females are there too) went up by 5 years to around 19 years from 1991-1993 to 2012-014

couple of points for Roz Altman to incorporate in a "basics for creating a pension with a lump sum"

first, an annuity rate is the ANNUAL rate at which you drawdown your capital.

second, a drawdown rate (using money in a SIPP for example) is the ANNUAL rate at which you drawdown your capital.

spot the difference? you decide the rate you get, or your annuity company does.

third, in 1991-1993 if you had drawn down your capital at 5% per annum with ZERO INVESTMENT RETURN OR FEES on your diminishing pot, you would have left around 30% of your capital to whoever is the beneficiary - an annuity company if you bought an annuity or whoever you named in your will.

on average, thhis amounted to a 30%"profit" to the beneficiairy. you get to the 30% by multiplying life expectancy by the drawdown rate and taking this number from 100% - so 14 years times 5% = 70%. 100% of what you started with less 70% paid out, gives you 30% left over "profit" (equalt to 6 years unenjoyed pension).

fourth in 2012-2014, if you are drawing your capital at 5% per annum with ZERO INVESTMENT RETURN OR FEES on your diminishing pot, you will (on average) leave an estimated 5% profit to your beneciary.

fifth, none of the above reflects the investment return, fees or inflation. provided we are not entering a Japanese style stagnant growth period as a result of its disgraceful twenty five years of easy monetary policy (QE) and fiscal deficits (of around 5% per annum - sound familiar?) it SHOULD be rational to assume a 3% nominal return over the next 20 years of your approximate life expectancy after fees on your slowly diminsihing investment pot today,

you should use a real return,that is, a return after inflation, but for the sake of simplicity i have left ignored this for now. the yield on UK Government long dated bonds is around 2% (compared to the 10% yield in 1991) so an uplift of 1% by investing a small proportion in low risk equities (say 25% in equties earning 6% per annum - could get you to that 3% per anum investment return.

sixth, using these assumptio and averages, and this time, including an INVESTMENT RETURN if you take 5% capital for 20 years and earn a 3% investment return (net of fees) you will leave 20% of your starting capital to your beneficiaries (annuity company or those in your will). You need to set-up a spreadsheet that draws down your capital at the net difference between the rate you draw down your capital (5%) and your investment return (3%) to get to a net draw down (after investment returns) of 2%.

seventh, if you want to drawdown all your capital over 20 years, using these INVESTMENT RETURN assumptions after fees, you would need to drawdown your capital at a little under 6% to exhaust it.

if you compare this 6% with the 5% best annuity rates at the HL website from the annuity industry, you will see that the annuity companies are making 1% a year on your capital, equal to 20% of your pot over a 20 year life expectancy.

seventh, if you assume you can get a net of fees annual average investment return of 5% per annum for twenty years, you could drawdown your capital at around 6.5% per annum. in other words, each 2% of an investment return you get, can lift your pension "drawdown" by 0.5% a year (if you make 10%, you can draw down 8% per annum - chance would be a fine thing to get a 8,000 pound pension (@8%) instead of 6,000 (@6%) for each 100,000 you have, for a 33% pension increase!)

eighth, there is a high probability in my book that investment returns will be negative from bonds and equtiies over the next ten to twenty years. in which case you need to hold cash, not bonds or equities. since the bank of england is pursuing a course of playing favorites (rewarding spendthrifts, money wasters and bad corporate actors) with its ill-advised monetary policy, there will be a financial market crash in the next few years, led by the banking, fund management and insurance sectors, so you should make sure your assets are ring-fenced from any bank, fund manager or insurance company.

lastly, nanny Labour and its boot licking lackey CASS want to remove your choice and instead, lock you into the lowest annuity rate/penions drawdown to keep you "safe". freedom v corruption writ large.

so there you have it - happy sunday.

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Gareth Harries

Mar 06, 2016 at 22:40


hooligan seems to have killed off the the thread.

However, as per Lawman, I think there are some serious points about the report.

1 The Nanny state should not treat everyone on the same basis. We do not need to have a Lowest Common Denominator in operation.

2. Yes the objective of a pension pot is to provide a secure income to the recipient to ensure that they do not fall back on the state. BUT there are many ways to reach that objective and again a Lowest Common Denominator approach does not need to be enforced.

3. There are people who have the "nous" to construct an approach, and the funds, to make an annuity irrelevant and they should be allowed the freedom to adopt this. If a constraint is artificially put in that any funds left will onerously be treated or taxed, that will encourage people to adopt the wrong attitude to their approaches.

4. It is unlikely that those who have carefully built up sufficient funds, through the prudent use of their money are likely to then use them imprudently when drawing down their pensions.

5. However, there is a significant grouping who have neither the "nous" or sufficient funds to be able to carry out a successful investment strategy; Lets face it most IFA's can not do it but just follow the doctrine they have to, and I'm sure there are many people that have sufficient funds that do not follow the standard advice blindly and I definitely do not....

6. I do not think reverting to the previous arrangements prior to the freedoms being put in place would be a good idea as they were overly restrictive and did not take into account the different ways that funds were built up e.g. not always in pensions, but the cumulative effect of the amount built up was the same.

7. I do think putting in place default (off the shelf) strategies for people to follow through using a decision tree would be extremely useful to help people make the right decisions, although I can already see some of the pitfalls of doing this in terms of the investment strategy. There are already sites such as Hargreaves Lansdown who have put this sort of thing in place that are readily available to those who wish to use Drawdown

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Mar 07, 2016 at 07:35

As often the way on this site, both the article and the comments are something of a curate's egg, and Gareth's are among the useful ones.

For me the issue contains two main questions. Sensible people have shied away from annuities because they have become such a bad deal. It was different for those who were getting an effective rate of 15% for their money in the early '90s! The poor rates since have been due to recognition of rising life expectancies, and the monetary policies followed by this and previous Governments. While life expectancy increases may now have slowed (and that is not necessarily good news), there is no end in sight for the abnormally low rates, and it is now quite possible they will continue for longer than expected - the next recession may well arrive first. Annuities will remain a poor buy for many, but at least some of those using drawdown may be badly caught out by the market volatility. There is no safe way of getting a better regular income.

The second point is about personal "moral hazard" - I agree with treating people as responsible adults and welcomed the new freedoms. Realistically there will be those - a sizeable number - who are not sensible and run out of money well before they die,encouraged no doubt by some unscrupulous advisers and members of their family who want to get their hands on some of the cash. The question is to what extent do the rest of us then provide a safety net above and beyond their State Retirement Pension?

We have a benefit system which has various cliff edges, where the sensible advice is to run savings down to the point where eligibility is restored. With freedom comes responsibility. One of the things that always irks me is hearing the same people who complain about the nanny state etc. who then demand help when their circumstances change.

Oh - and banging on about the loss of dividend tax credit nearly 20 years ago really is yesterday's news and of little relevance now compared to changes in the LTA and contribution rates.

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Mar 07, 2016 at 08:15

yep, the world is full of people looking down on others and removing their freedom of choice by hiding behind flowery language and complex advice. the state pension and local authority care homes are the safety net for those who spend their own money, that's for sure.

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Mar 08, 2016 at 17:07

Apologies for the delayed follow up but I have been away for most of the last two days. The safety net suggested by Hooligan is not reliable into the future - the current financing model of the state pension is unsustainable even without the "triple lock" as the ratio of contributing workers to pensioners is projected to continue to significantly decline despite the current levels of immigration.

The choices are to increase taxation, push back retirement age faster and further, or to means test it. As is now being slowly recognised, most people coming up to retirement age will not be eligible for the full new state pension and this will be the case for many years.

There are already insufficient local authority run care homes, and the level of fees they are wiling to support is often less than charged in the private sector. Such help is still refused to those who have more than £23k, and the LAs may be able to view pensions drawn down too quickly as a deliberate deprivation of capital.

So it could come to this - are we and are our politicians willing to see an increase in pensioner poverty and ignore such peoples' plight? And before any of us say it would be all their fault, we could be among their number if it turns out our investment decisions are poor.

So no I don't look down on anybody.

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Mar 08, 2016 at 17:39

generational conflict for existing resoruces against the squandering of past resources via the folly of the past and the folly of the present.

my view is that

persistent lying, cheating, fraud, embezzlement, poor wrokmanship, short cuts, "feeding at the taxpayers trough", keynesian fiscal policies like subsidies, tariffs, guarantees etc, (and latterly the cost to the economy of the monetization of government debt by central banks), wars with countries we will never be able to visit

is exactly equal to

the size of the national debt and is largely responsible for the ongoing fiscal deficit.

bit of a leap perhaps, but i firmly believe the argument is ciruclar and that the value of those negatives has to be accounted for in this way, in much the same way that I believe a trade deficit is a failure to provide education of the required sort and level.

we can either let this "status quo" persist or get some of our best thinkers together to reshape the implementation of government policy away from failed fiscal policies and towards the provision of services in retirement to cater for an increasing demographic, rather than avoiding the issue entirely and instead persisting with those negatives

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Gareth Harries

Mar 09, 2016 at 00:23


There seems hooligan to go again, killing off the thread with a set of statements that have no cogency in their reasoning or any articulate argument.

The points made may well be right, but there is no way of knowing as it is just a blast, without any cogent thought process.

As horshatim said there is a lot of curates eggs, and I think hooligan's last one counts as one of those.

He may well be right but there is no way of knowing as there is no reasoned argument.

If you want to contribute to the discussion at least put together some reasoned cogent arguments rather than just a blast that is practically impossible to follow.

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Mar 09, 2016 at 01:14

Are you some sort of editor of this website or do you work for God's thought police, Mr harries?

I haven't see you contribute anything positive but please fo let me have your "contribution guidelines" so I can ignore it..

Hope you enjoy your curate's omelette..

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Gareth Harries

Mar 10, 2016 at 20:56

Hi hooligan

I really shouldn't deign to reply to your posting, but I will.

I think more to the point is what are your contribution guidelines?

I enjoy the CityWire ability to post comments and the learning that often goes with them. However, in some cases it seems people just blast away without any real contribution, possibly with good intent, but any real understanding is lost in the way the message is put across.

As to positive comments, I think you should look at you own comments first before challenging others.

As to ignoring, I will just follow others lead in this case and totally ignore yours in future...

And I love omelettes ...

Mr Harries

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