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Tuesday, 31 July, 2001, 14:28 GMT 15:28 UK
Consumers angry at 'pension trap'
Frank Howarth says he's caught in a pension trap. He is 56, and has spent more than 40 years in the motor trade. He was one of the first generation to follow government advice and take out a personal pension.
BBC Radio 4's Inside Money presenter Lesley Curwen investigates the law on pensions.
Everyone with a personal pension will eventually have to use their pot of money to buy an annuity, a product which guarantees to provide a regular income for the rest of their life.
It sounds reassuring, but there are some big drawbacks.
Investment returns on annuities have almost halved in 10 years and once pension money is put into an annuity, it cannot be handed down to next of kin after death but is absorbed by the insurance company.
"It is like someone coming along to an old person, hitting him over the head, pinching his wallet and leaving him the bus fare to go home. If I knew then what I know now, I would never have taken the pension out," says Frank Howarth.
With a pension pot of £90,000 he was told he would get an annual pension of about £6,500, if he took out the simplest form of annuity.
That would represent an annual return of just over 7%.
Annuity rates have fallen dramatically because we are all living longer, so potentially the money has to stretch further, and the safe government bonds often used for these ultra-cautious investments have produced poor returns in an era of low inflation.
Frank was upset that he could not control his own pension investments, to get a better return, but his chief gripe was about the potential disinheritance of his family.
And he came face to face with someone who had struggled with this problem and suffered great distress.
Families miss out
Asker Jetha believes annuities are a form of "legalised theft". He had been looking after his mother's financial affairs for years, and had advised her to get a personal pension.
Asker read a newspaper article which made him realise she would be forced to buy an annuity, and when she did, the capital sum from her pensions savings would be lost to the family on her death.
Asker's mother was approaching 75, the age when the government insists that all personal pension holders must use their pension pot to buy an annuity.
The pension pot of £55,000 had to be invested in an annuity, and effectively, the money was lost to the family for the future.
Asker pointed out the anomaly.
"If a pensioner died before he is 75, then his beneficiaries can inherit the capital sum, whereas just reaching one day more than 75 means the whole amount is lost."
It became clear that Asker, like Frank, had not originally understood the vital connection between a personal pension and the need to buy an annuity.
"I thought it would give us a capital sum at the end and from which we can draw, and also we worked as a family unit, so I got my sisters and myself, we also put in quite a lot of work and time into the business, and now we're just seeing our savings disappearing into a black hole."
Calls for reform
There is now increasing pressure for reform.
We took Frank Howarth to meet Dr Oonagh McDonald, director of the Retirement Income Reform Campaign, who has put forward proposals for an alternative system - a half-way house where people must use some of their pension pot to buy a minimum annuity to provide a basic income.
The rest could be invested as the pensioner wished.
The government has made it clear it doesn't favour Oonagh McDonald's proposals.
Instead, it has pinned some faith on new developments within the insurance industry for more flexible annuities.
Frank turned to the Prudential, to look at its Flexible Lifetime Annuity, which offers a choice of 14 equity-based investment funds, and some protection of your original fund.
But sadly, the product was only on offer for people with a pot of £100,000 or more.
Frank didn't have enough money. And he wouldn't have enough for another new flexible product, the "Open Annuity" from London & Colonial, where the funds can become part of the pensioner's estate, and may be inherited by the family.
But it is aimed at those who have a pension pot of a quarter of a million pounds, and that is not Frank.
At the end of his time with Inside Money, Frank Howarth was still angry about the annuity trap, but he was more hopeful that things might change.
After all, he's got 19 years before he reaches his 75th birthday.
Inside Money is BBC Radio 4's documentary series led by listeners on issues that make their blood boil.
You can hear Inside Money at noon on Saturday. The programme is repeated at 3pm every Monday on Radio 4 92-95 FM and 198 LW.
20 Jul 01 | Programmes
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