Varying annuities

Something of a shouting match going on here. The annuities that are often bought with pension pots (in fact, it\’s still law that by age 75 you must have spent the pot on such isn\’t it?) are to be varied by likely lifespan.

Seems entirely fair: annuities already vary by sex and it\’s possible to get better rates by revealing that one is a smoker. Both sex and smoking makle a difference to expected lifespan so it\’s actuarially sensible. What is getting some people here is that the variance will also be determined by postcode. But as we know that those in wealthier areas live, on average, longer than those in poorer, this also seems sensible.

It is, if you look at it with the right squint, a reduction in inequality.

Shadow Secretary of State for Work and Pensions Chris Grayling said: “I’m worried that people will be penalised for looking after their health. The whole principle of the pension industry is that risks are pooled.

Dear Lord, no ondwer were so screwed up is the Minister responsible thinks that. The pensions industry is about savings and the possible earnings from them. It\’s the insurance industry which is about pooled risks. Sheesh.

 

 

11 thoughts on “Varying annuities”

  1. Two points:

    1) Payments into the pension fund do not vary according to Post Code.

    2) What happens when an annuitant moves from one Post Code to another? Pension to vary?

    Somehow I doubt it; otherwise it would make sense for someone approaching the point of buying the annuity to move to the worst Post Code imaginable to secure the highest payout and the move again to the area he/she intended to be resident in.

    The principal is not only daft but inequitable.

    Of course, by far the better solution would be to abolish the requirement to purchase an annuity in the first place and leave it to the individual as to how to use the pension pot.

  2. And, by the by, annuities are a form of insurance, so the pooled risk analogy is entirely correct.

    It’s just that the insurance risk is the reverse of life insurance. An annuity gives the payout upfront and the provider takes the risk of how long to payout. Insurance, you see?

  3. “The principal is not only daft but inequitable. ”

    It’s not ‘inequitable’ in a free market for annuities. Only if there is collusion and a rigging of the market is it inequitable. If you don’t like the postcode arrangements then don’t buy the stupid annuity (or game the system by moving house to a poor area, take the annuity, then move back).

    On a related point, anyone know why today I can’t take up smoking prior to buying an annuity, then give up smoking immediately?

    “By far the better solution would be to abolish the requirement to purchase an annuity in the first place and leave it to the individual as to how to use the pension pot.”

    Not quite: the requirement to buy an annuity comes from the need to prevent access to welfare. Of course, if welfare were abolished and we had a citizen’s basic income, we wouldn’t need the rules and wouldn’t need tax incentives to save for a pension either.

  4. “It’s not ‘inequitable’ in a free market for annuities. ”

    An open market annuity option is not quite the same as a ‘free’ market; the market can only be free if you can step outside of it and eschew the annuity altogether.

    And it’s not quite the need to “prevent access to welfare” but a quid pro quo for the tax relief provision on pension contributions, which are an encouragement to self-reliance rather than a welfare inhibitor.

    Indeed, this government has shown no sign of wanting to prevent access to welfare. On the contrary it has actively encouraged it for the purpose of creating a client state more likely to keep voting it back into power.

  5. Very briefly, you don’t have to buy an annuity with your pension pot at age 75. If you are withdrawing income (Unsecured Pension) from the pot, at age 75 you can continue to do the same, with some restrictions, under Alternatively Secured Pension (ASP) for the remainder of your lifetime, and your spouse for her lifetime thereafter, and then it will pass to her estate subject to tax of currently c80%.

  6. “And it’s not quite the need to “prevent access to welfare” but a quid pro quo for the tax relief provision on pension contributions, which are an encouragement to self-reliance rather than a welfare inhibitor.”

    That’s precisely what I meant by “access to welfare”. That’s the reason for the tax relief. If the welfare system were reformed, there’d be no need for tax relief, no need for pensions being any different to other savings, and no need for annuities other than their pure demand from savers with lump sums who, as you say, can step outside the market and eschew them.

    Anyway, there is no requirement to buy an annuity at 75: you can instead opt for an Alternatively Secured Pension, i.e. a DIY annuity paid from income, which must be between 55% and 90% of Government actuarial annuity values.

  7. Kay Tie: Of course, if welfare were abolished and we had a citizen’s basic income, we wouldn’t need the rules and wouldn’t need tax incentives to save for a pension either.

    Totally and utterly agreed! We argued about this recently on this very ‘blog and I thought you preferred tax breaks/means tested pensions?

    Having dug up the figures, it turns out that the total cost/value of the tax breaks is entirely swallowed up by the ‘Pensions Industry’.

    For pension savers, taken collectively, it is a negative sum game.

  8. Mark:

    What you note of the pensions industry is simply an example of a far broader principle which is not “scientific” in any ordinary sense but is yet operative in and applicable to so many areas of life that it is surprising its truth is not more widely recognized.

    There’s no economic “law” that creatures of the government shall tend toward and nearly always become wasteful, inefficient, etc. But that’s still the outcome in almost all cases, whether we speak of various government units themselves or merely private-industry units whose affairs intersect significantly with government, either via subsidy, regulation, or merely contractual relationship. The effect is so pronounced, especially over time, and simultaneously, so subtle, that, though very many observe the effect, the causative connection escapes almost entirely unnoticed.

    The entire matter is wonderfully treated in a little book (BUREAUCRACY, by von Mises)–only 5″ X 8″ and 125 pages. Despite its brevity, it’s important in emphasizing the inevitable and unavoidable inefficiency attendant on virtually everything “touched” by government and, it is hoped, the enormous stake of the at-large citizenry in preventing bureaucratization by limiting the spread of authority as sharply as possible.

    It would be mistaken to say that government has no legitimate role or that “everything the government touches turns to shit.” But not by very much. One other benefit you’d get from its reading: you’ll know (and know that you know) virtually everything worthwhile on the topic.

  9. “Dear Lord, no ondwer were so screwed up is the Minister responsible thinks that.”

    Chris Grayling is a Conservative.

    “The whole principle of the pension industry is that risks are pooled.”

    Like – as you say – the insurance industry. Imagine the outcry if car insurance was based on post-codes.

    Oh, the inequity!

  10. “Both sex and smoking makle a difference to expected lifespan”

    What about sex while smoking?

    The actuaries know their own business best. We should let them get on with it and tell the political prodnoses to go and pound sand. Every time they interfere with markets they hex everything.

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