In defence of annuities

The new issue of Standpoint carries an interesting article from Robin Harris – director of the Conservative Research Department from 1985 to 1988 and member of Margaret Thatcher’s Policy Unit from 1989 to 1990 – on the subject of pension reform in Britain. Whoa, don’t all rush for the exit at the same time; this is worth your time – an interesting examination of the tensions that can crop up between free-market capitalism and conservatism.

Rule changes announced by Chancellor George Osborne in his March budget mean that retirees with private pensions will no longer be compelled to buy annuities. This has been uniformly welcomed by those on the Right of the British political spectrum – their views well summarised by CityAM Editor Allister Heath: “Labour would be mad to jump on its paternalistic, nannying high horse and to oppose Osborne’s pension liberation.” For many neoliberals, eliminating the coercive requirement to buy an annuity is akin to Thatcher’s Right to Buy legislation, which enabled council house tenants to buy their homes at discounts, based on their years of tenure.

 

As Harris argues, however, there is a world of difference between granting people the right to buy a house, and giving people control over a large sum of money and asking them to invest it wisely. The latter obviously being much riskier and mentally demanding than the former.

 

This is doubly so when the Bank of England – backed by the government – continues to keep real interest rates in negative territory, meaning you cannot get an above-inflation return on simple, easily understandable savings products. Combine this with the fact that people are living longer and spending longer as retirees, and we arrive at a situation where investing in shares, property, high-yield, high-risk bonds and alternatives like commodities will become the only rational options for new retirees looking to protect their capital from inflation.

 

Some will manage to do this, just as some young people successfully deal with Mr Market. But it doesn’t seem a stretch to imagine that most won’t manage well, given general ignorance of high finance and investment products, and the sad fact that mental faculties decline with age.

 

Call it an unfortunate irony of central planning: when one policy of the leviathan state (encouraging spending and discouraging saving) complicates another policy from the same state (giving people greater freedom to spend their retirement funds).

 

 

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Posted May 28, 2014
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