Julian Knight: When it comes to annuities, an adviser can be invaluable
Many finances can be DIY, but retirement income needs an expert eye
Saturday 27 April 2013
Iam all for DIY family finances – it is part of the reason I started writing about money many years ago. The advice industry has persistently been shown to put the interests of product providers – who on investment sales until recently paid commission – over those of investors.
The number of mis-selling scandals I have written on could fill this column and always at the root has been bad, biased advice. However, this doesn't mean there isn't a place for good advice – a fee-charging independent adviser with the right qualifications, with whom you can establish a long-term relationship, can be invaluable.
One area where I heartily recommend people take advice is when buying an annuity contract to convert a pension pot into an income for life. The problem for years has been that people have simply signed up to the inferior annuity rates offered by their pension provider rather than shop around. Consumers devote 26 times less of their time choosing an annuity than they do Christmas shopping, insurer Aviva's research has found – frankly I'm surprised so much time is spent on an annuity.
So you would think I would welcome Tesco getting involved in annuity sales. In effect, it hopes to bring its supermarket principle to this underserviced, but crucial, market. However, I'm not that enthused.
First, Tesco has been shown to be a purveyor of very ordinary financial products to date, so I'm not sure if it will be able to offer real value. In addition, I think annuities should be an advised purchase. There are all sorts of pitfalls to watch for – such as not buying an annuity that dies with you if you have a partner, or purchasing one which is not protected against inflation when you are likely to live – with average luck – close to a quarter of a century in retirement.
It can be a good idea to have someone qualified to go through some key questions with you. They can spot, for instance, if you have what may seem a relatively mild ailment which could entitle you to a higher annuity because you are likely to live a slightly shortened life than the average.
The more choice the better, maybe, but I wouldn't choose a DIY an annuity, it is too important for that.
Independent pensions dilemma
There has been a lot of talk on whether Scotland would be allowed to keep the pound if it votes for independence next year. But of equal importance is what the new nation would do about its pension funds.
Seemingly, the Scottish National Party's sole economic get-out-of-jail-free card is North Sea oil and gas. Free prescriptions or old age care? The North Sea will pay. A far bigger state sector than England? Again, the North Sea is funding.
However, pensions are as long-term expense as it is possible to imagine and it will comfortably outlast the oil. What is more, Scotland's population is ageing faster than the rest of the UK, and proportionally there are fewer young immigrants wanting to work there than in England, for instance.
The Institute of Chartered Accountants of Scotland (ICAS) has said that an independent state would be weighed down with its pensions liability for the public sector, much of which is unfunded. As for the UK-wide pensions protection fund – which acts as a backstop for failing schemes – the ICAS argues this would have to be split and again could be a huge burden on Scotland.
What's more, the large number of pension funds now in Scotland would face tougher EU solvency requirements as post-independence they would be considered "cross-border". There is the distinct possibility these schemes could move south where the hand of the EU will be gentler.
And none of this takes into account the fact that an independent Scotland may not automatically be an EU member; nor what happens to national insurance contributions and the state pension. In short, untangling the pensions position of Scotland could be the biggest headache of the lot, should the Scots vote to leave the union.
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