Pension Pot Luck

Imagine being allowed to own your own pension. Why, you might do something silly with it.

What a shocking idea. Imagine being allowed to own your pension. Why, you might do something silly with the money. Next, someone will suggest that you should own the house you live in. Just think how risky a mortgage is. Much safer to stand in a queue and wait for a council house.

Next month that shocking idea will become stark reality. The rules about pensions are being reformed. Until now, they have given you Hobson’s choice—decreeing that when the time comes, the money in your pension pot must be used to buy an annuity. Once you have bought it, you are stuck with it. You cannot change it or sell it, and when you die, it dies with you and leaves nothing behind.

You might even have settled for this if the annuity brought you a decent income, but nowadays it doesn’t. Interest rates have tumbled, bonds may now yield little or nothing, and annuities, which are backed by bonds, have become expensive. If you were retiring at 65, you would now find that £100,000 would buy you an index-linked income of less than £4,000 a year. For a wasting asset, this, so you might think, is an offer you could refuse—if the rules allow it. After April 6 you can make your own decisions. You, after all, are the owner.

Observe, though, that if your prospective pension derives from your employer, you do not own it. Nobody does. It will probably be a “defined benefit” pension, related in some way to earnings, and a pension fund has been created to pay for it. Just now the fund may be struggling. Its liabilities are measured against the cost of providing you with an index-linked income, and bonds are the yardstick. Many funds are in deficit, and employers are having top them up, with money that might have been invested productively. BT has just poured £7 billion down this hole.

These are not decisions that you would be likely to make for yourself. Bonds can be said to offer risk without reward, and some of Her Majesty’s Government’s stocks are now priced to lose you money. You would look for investments that yielded more and might, over time, be worth more. There is nothing inherently risky about this approach, and it could well suit everyone, the employers included. Most of their schemes have been closed to new entrants but still have half a century of life ahead of them. They need the reform that would enfranchise their beneficiaries and establish them as owners. That would be another shocking idea, but its time must be coming.

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