Home > General Politics > The unintended consequences of the annuity revolution

The unintended consequences of the annuity revolution

Labour and Labour’s supporters are busy looking through the detail of yesterday’s budget announcement around pensions, but as far as I can see the most they’ve come up with so far is some stuff about it being a dastardly bridgehead to removal of other pensioner benefits.  This seems to me to miss the bigger picture

There is little doubt that the key idea – the removal of the need for an annuities for defined benefit pensions – is politically attractive, as it can be sold as greater choice/the government not telling you what you have to do with your money. But the long term consequences of such a change are worth considering:

1) The reasons for annuities in the first place – a secure income for as long as you live, and the onus on insurance companies to work out how long that might be on average, how it might change as life expectancy increases, and price their annuities accordingly – is to be replaced by a free-for-all in which people have to guess how long they might live and plan accordingly.  As life expectancy increases (at least amongst the previously somewhat better off), poverty in very old age may beckon for many.

2) While this  may simply mean that many pensioners will stick with annuities as the safe option, it may also lead the the rapid development of a property-selling industry pitched at new pensioners, on the basis that fast property price increases will outdo annuities as an income source (and perhaps enable larger annuity purchase later on), even given the income tax hit if you don’t buy an annuity.   I forsee lots and lots of mis-selling to vulnerable clients, given asymmetric information.

3) This could lead to a) a house price bubble even greater than the one we have now; b) greater retirement condo building c) a combination of both.

4) Most likely, though, it will lead to an even greater generational divide, with defined benefit pensioners buying up housing at ever-inflated prices and renting out to those increasingly unable to get on the property ladder.

Has the Treasury thought through the potentially massive scale of these unintended (or maybe they are intended) consequences?  I suspect not, what with votes and that.

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Categories: General Politics
  1. Robert Newby
    March 20, 2014 at 1:45 pm

    what happens if you`ve already bought an annuity? have you “missed the boat”, so to speak?

  2. March 20, 2014 at 4:18 pm

    I’m sure they have thought through those consequences. They see an immediate tax take as people cash in their pension pot, increased consumer spending boosting the economy as they spend it, a further desperate effort to keep the house price bubble inflated, as pensioners either buy to let or else lend to their kids for a deposit on over inflated house prices etc.

    What they have not taken into consideration is the effect on interest rates, which is showing the contradiction in their policies. Global interest rates are rising, which threatens the continuation of the property bubble, and with it the balance sheets of the banks. They continue to believe in the God like power of central planners like Carney to dictate prices – here the price of money – in the face of the ineluctable move higher by the market rates of interest. That in itself sits oddly with their free market claims!

    The only thing Carney can do with the official interest rate is put a cap on the rates paid to savers – already if you are a borrower, you are paying anything from 6% on a mortgage up to 4000% on a Pay Day Loan! There is a disparity here that sits badly with the Tories need to win the votes of pensioners. Hence the efforts on savings, which remain rather pathetic. There is no point being able to put £15,000 into an ISA if its only paying you 1.5% interest. The tax you save on bugger all is itself just a fraction of bugger all!

    But, despite the fact of supposed competition between annuity providers, they have had more or less a monopoly, because everyone had to take out an annuity, and most people cannot wit until they are older to get one at a better rate. If people start to take out their pension funds that will no longer be the case. Already the share price of the annuity providers and insurance companies have tanked on the expectation.

    The contradiction of the policy is that if you think that buying a London property could net you 10% capital gain in a year, you are not going to accept an annuity rate of 3%. Consequently, annuity providers, if they want to hang on to this business will have to quickly raise annuity rates. But, if they start to raise rates, then other deposit institutions will have to follow suit. The policy of financial repression begins to crack apart. Interest rates for savers causes interest rates for borrowers to rise, which means the house price bubble bursts, the bond bubble bursts, the banks whose balance sheets are a fiction go bust. A worse fiancnial crisis than 2008.

  3. March 21, 2014 at 11:09 pm

    “it may also lead the the rapid development of a property-selling industry pitched at new pensioners, on the basis that fast property price increases will outdo annuities as an income source”

    Not really. You’ll have to pay tax on withdrawals at your highest marginal rate, so someone with say a 300K pot (making him among the most well off non-final salary pensioners – the average pot is only 30K or so) will pay around 42% if he takes the lot in one go. 180K won’t buy you more than a one bedroom flat in the south east.

    What I can see happening is parents drawing down the maximum inside the 20% tax allowance – to fund their children’s house purchases or boost their deposits.

    I’m not sure why writers on the left tend to see pensioners as “I’m alright Jack” selfish types. Most of them have children, and can see how much more difficult life is for their generations.

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