When the new pension rules were announced in George Osborne’s Budget, we were, like everyone else, pretty impressed.
However, we also noted that this would give the financial industry the perfect opportunity to show us, yet again, that there is nothing for which they cannot find an expensive and complicated solution. They’ve taken that opportunity already.
Given that the rules on annuities and drawdown change from next April (allowing everyone to effectively enter flexible drawdown), it doesn’t make sense for those retiring today to buy annuities as they might have in the past.
It makes sense, instead, for them to either defer taking their pension or to simply enter some kind of drawdown now and just spend the cash they need for the year.
However, that hasn’t stopped the introduction of ‘stopgap’ annuities – ones that either expire after a year or come with a ‘surrender clause’ built in. Providers say that this gives flexibility ahead of the reforms, but, says the FT, “concerns have been raised about the cost and complexity of these products”.
The Financial Services Consumer Panel has raised concerns about the commissions – 1.5% to 2% of the customer’s pension upfront and more on surrender – and others have mentioned the shocking rates on offer.
Pensions expert Ros Altman notes that the offerings from LV= and Just Retirement offer effective rates of just 0.5%. This is, as she says, “awful value”.
The good news here is that many institutions aren’t offering these products. The disappointing, but entirely expected news is that names that should be perfectly respectable are offering them.
We can only hope that an increasingly financially educated pensioner population doesn’t fall for it.