IN 1811 Jane Austen wrote that “an annuity was a very serious business”, and in this, as in so many other matters, she was right.
The timing of the buying of an annuity — a fixed-interest insurance company investment — can make all the difference between the easy life in retirement or merely getting by. Anyone who regularly scans the annuity rate tables in our Databank section (pages 18-19) will have spied that the income available from annuities is shrinking even faster than before.
At the beginning of November, a 70-year-old man with a £100,000 pension pot would have been able to secure an annuity with an income of £8,138 from Norwich Union. This has now slid to £7,944. The difference may be only £194, but the trend is worrying nonetheless.
The fall in yields from government gilt-edged stocks, which determine annuity rates, is to blame. At present, pension funds are frenzied purchasers of gilts, trying to shrink the deficits between their liabilities and their holdings. But as gilt prices rise, yields fall. There are now calls for more gilts to be issued to assuage demand. William Burrows, of William Burrows Annuities, says: “The Government must address the supply issue: there just aren’t enough gilts to go round.”
Will the Treasury acknowledge the crisis and act to protect the welfare of the millions who are required to use their pension funds to purchase annuities? Since the Government has failed to keep its promise of thorough reform for annuities, it may be best not to rely on help from this quarter. Instead, anyone who faces the prospect of buying an annuity should look to the concessions that will take effect on April 6, known as A-Day.
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For example, all savers will be able to take 25 per cent of their pension funds as tax-free cash, not just those who bought their plans at the right time. The alternative secured pension will also make its debut on A-Day. Under this provision, you will no longer be required to buy an annuity at 75 but can continue to draw an income from your fund. This arrangement offers some scope to pass on your fund to your heirs, although the tax rules have yet to be clarified. Do not shout hurrah quite yet.
Don’t settle for reliably mediocre fund managers
ARE you sitting comfortably? Then Times Money is about disturb your chilled-out weekend mood. The rise in the stock market may have led you to believe that you are sitting pretty, with your Isas and other holdings having increased in value. But you may not have benefited from this revival because the custodians of your cash cannot excel, even when share prices are prospering.
Bestinvest’s regular survey of investment funds indicates that, in the bad times and the good, some managers are reliably mediocre. As a result, savers have £3.2 billion invested in 38 “dog funds” that have not only underperformed their benchmark index in each of the past three years, but also missed this benchmark by at least 10 per cent over the whole of the three-year period.
No fewer than six Scottish Widows funds appear on the list, including its £419 million Global Growth fund. AXA, another insurer, is also in the doghouse. Had its UK Growth fund kept pace with its benchmark, £100 invested three years ago would now be worth £222. UK Growth investors have to content themselves, however, with a more modest return of £140.
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Five Japanese funds figure on this roll of dishonour, including Lincoln Japan, the management of which is outsourced to Goldman Sachs, the organisation famous for the fabulous earnings of its workforce. Lincoln Japan holders may be happy enough when they learn that £100 invested in the fund three years ago would now be worth £160 — a result that does reflect some of the resurgence of Japanese shares — but if the fund had met its benchmark, that £100 would have grown to £189.
Would Goldman Sachs employees choose to put their bonuses into Lincoln Japan or into a fund that was exploiting the Tokyo stock market’s turnaround to better effect? It’s an interesting question. But owners of any of Bestinvest’s dogs (call 0800 0930700 for a free guide) would be better off spending some of their lazy weekend checking how their funds are faring at www.timesonline.co.uk/funds.
Big Brother’s small potatoes next to Doug’s reality check
FOR some viewers, the antics of Michael Barrymore, George Galloway, Maggot and the other inhabitants of the Celebrity Big Brother house are reality TV at its most entertaining, embarrassing and all the other emotions the genre is supposed to excite. However, for many, the essential reality show is Dragons’ Den on BBC Two. Real life entrepreneurs seek finance for their ventures from the panel of picky financiers who have themselves built businesses. Do you cheer when a pitch succeeds? Yes. Do you cringe when funding is sought for some hopeless product? You bet.
This week Doug Richard, one of the Dragons’ Den panellists — the plain-speaking American, often more patient than the rest — joins Times Money to give his assessment of the entrepreneurs who feature in our Go It Alone series. These are brilliant small businesses with bright futures, led by people who recognise that it is worth listening to advice from a man who knows.
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For the latest small business news and advice visit www.timesonline.co.uk/enterprise