John Willcock: Two weeks ago I attacked the requirement that pensioners must buy an annuity at the age of 75

Pensions options, and pitfalls, are laid bare by the Mortgage Journalist of Year
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The Independent Online

Two weeks ago I attacked the requirement that pensioners must buy an annuity at the age of 75, concluding it was "high time this nannyish rule was scrapped". This prompted several letters last week saying that, for a start, there were several more flexible annuity products on the market these days, and anyway, the Government had only given you these tax breaks in order to save for a pension, so it was the least you could do to actually put it into an annuity, as opposed to blowing it all on a cruise around the Caribbean.

This in turn spurred a quintet of readers to write in this week supporting my original point ­ the compulsory annuity rule should be ditched.

First, let me recap how the debate started. My main point was to question why we still maintain in this country the rule that people must buy an annuity with 75 per cent of their pension "pot" when they reach the age of 75. An annuity is simply a product you buy with a capital sum, and which then pays you out a payment each year until your death. The capital is traditionally invested in gilts, that is, government-issued IOUs. The rules were put in place to ensure people secured an annual payout to provide an income for life. Otherwise, he argument goes, pensioners might be tempted to fritter their pension pots away on cruises, fast cars etc.

The problem is that inflation and interest rates have plunged from the historical highs of the 1970s and 1980s, so that the average pension pot now pays out an increasingly paltry sum each year. You are only allowed to invest a miserly amount of your pot yourself, through "income draw-down" schemes. To make matters worse, when you die, the capital that is left reverts automatically to the insurance company.

My article was prompted by Michael Ruttley, from the Vale of Glamorgan. Mr Ruttley reckons that successive governments have been in "unholy alliance to ensure that much of the benefit of such [pensions] savings goes to the insurance companies".

As an example, he describes how his wife recently retired and sought to maximise the return from a with-profits personal pension plan. Over the years, £22,550 had been paid into the plan at a real cost to the couple of about £13,500 after tax relief. The eventual pot was about £40,000 of which she obtained some £5,000 as a tax-free lump sum. The remainder was used to buy the best annuity they could find for their needs and this gives her some £1,800 gross per annum. If you assume that the lump sum earns 6 per cent, the pension is now £1,800 plus £300, or £2,100 a year. The insurance company has the £35,000 capital.

Mr Ruttley says that if they had been able to take the whole pot and invest it, the annual income, at say 6 per cent, would be £2,400 ­ and they would have the capital. He admits his argument is "broad-brush" and ignores inflation, but concludes: "If negating the undoubted tax benefits of pension plans by compulsory purchase of miserable annuities is not a sting I don't know what is."

I suggested that the obvious solution would be to change the rules so only a small part of your pension has to go into an annuity, the rest to do with as you like. I concluded: "It is high time this nanny-ish rule was scrapped."

Stephanie Hawthorne, editor of Pensions World, makes a similar point in her latest issue: "Stakeholders and defined contribution scheme members are compelled to take an annuity for 75 per cent of their money by the age of 75, even though they many not be the best performing investment over the long term. Many have to live off annuities for over 30 years. Yet most annuities are invested solely in government bonds and these have underperformed equities over 10, 20 and 100 years! The real return of equities over 50 years is 7.7 per cent a year, compared to 1.2 per cent for gilts.

"With compulsion to buy a mediocre product, are we denying lower income groups in particular the chance to keep up with inflation and ultimately even to give something away to the next generation?"

Wise words. And yet the Government seems to determined to resist these calls, if the letter from Melanie Johnson MP, Economic Secretary to the Treasury (see right), is anything to go by. We shall continue to campaign for change, and welcome your letters on this subject.

¿ j.willcock@independent.co.uk

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