What's the issue with Company pension contributions?

[Hiram King Of Tyre]

Sounds like there are some benefits I'm not aware of. Elaboration would be much apprecirated.

What I mean is that you can will your pension on without any Inheritance Tax Liability. That means that it doesn't count towards your estate on death. Make sure you name the beneficiary though.

[ASB]

The reason people don't like annuities is because people cannot think probabilistically. They don't understand that an annuity returns all your money, with interest, when you calculate the probability-weighted average of your returns across all possible futures.

Annuities return all the money with interest less the providers profits. These profits could be huge. Or perhaps they are low. Lack of easily available mortality information makes it fairly difficult to ascertain just what sort of value an annuity is.

However, I think the market competitive and providers profits are reasonable rather than excessive (as they used to be before open market options were more readily available.

The problem I see at the moment is that the yield on an annuity is often only marginally better than the yield on cash on deposit. Thus for those who could forgo some income they could be in the position of enjoying a modestly smaller income and preserving their capital.

I think it is wrong to force the annuity route (however if it wasn't forced - which is changing anyway) then ther may be pressure on people to go some sort of capital preserving route. This is going to hit the less well off.

[IR35 Avoider]

I agree insurers costs/profits are an issue. Another issue is what your money is invested in, for people who want their income to be backed by something more adventurous/lucrative than government bonds. Both problems are solvable, you just have know what you're doing and shop around.

One product I saw had as much investment freedom as a SIPP, the insurance company took 0.75% (additional to any management charges on any funds you might choose, though you don't have to choose funds) and the use of mortality tables was only so they could estimate a safe rate of withdrawal and comply with HMRC rules re. withdrawal. 100% of "profits" from unused capital when people died were redistributed as "mortality bonuses" to others in the scheme. So, invest how you like, pay only the investment management charges you choose, and the only unavoidable overhead/profit to the insurance company was 0.75% a year. (Company was Prudential.)

The main disadvantage I see with this scheme is that people educated / intelligent / motivated / wealthy enough to seek it out probably have a very long life-expectancy, so you're placing yourself in a relatively unprofitable risk pool. It might be better to just go down the very conventional route and try and get in with a bunch of chavvy smokers from council estates.

I don't have a problem with people disliking the compulsory aspect of annuities, it's when they disrespect them when they clearly don't understand them that I get annoyed.

When people say there's something wrong with annuities, in principle, I say no there isn't, in principle they are wonderful.

Whether there is something wrong in practical reality depends on peoples personal priorities, what kinds of products are available, and how much they cost.

[IR35 Avoider]

Incidentally, 15 year gilt yield currently 4.52%, annuity rate for 65-year old male currently 7.5%, so the annuity currently gives 65% higher income, though of course the premium is rewarding you for surrendering your capital.

(15 year gilt is the appropriate thing to compare ordinary annuity to. If you want to compare with the rate on a savings account, then the only fair way to do it would be to compare with the self-invested annuity, which can invest in a savings account, in which case the annuity yields 0.75% less. But this would be a bizzarre use of a self-invested annuity.)