Pension Guarantee in Private Pensions
- If you’ve been considering a Personal Pension, but want to understand the pension guarantee better, you’ve come to the right place.
- We often get the question of where the pension guarantee comes from? And how guaranteed is it really?
What Does the Pension Guarantee Mean?
The Personal Pension’s pension guarantee is that you’ll receive a fixed, steady amount of annuity income every month in retirement. Why is this pension guarantee important? Well, unless you’re one of the lucky ones that still gets a pension from your employer — a pension, not a 401(k) — then your retirement plan doesn’t offer you any guarantees. Instead, it helps you accumulate money, exposing you to two key risks: (1) the market underperforms or crashes and (2) that you live longer than you’re financially prepared to. These are new risks for individuals to be facing all by themselves, as employers used to do this for us when they offered us pensions.
Instead of having a retirement plan that forces us to be investment experts or guess at how long we’ll live, the Personal Pension eliminates the need for guesswork or expertise. It very simply provides a pension guarantee of a retirement paycheck no matter what happens in the market or how long you live.
Where Does the Personal Pension’s Pension Guarantee Come From?
The Personal Pension is guaranteed by insurance companies rated A or better by A.M. Best. Think companies like Guardian Life or Lincoln Financial. Most insurers we do business with have existed since the 19th century.
How is an insurance company able and willing to promise you payments so far into the future? Let’s start with how an insurance company operates. An insurance company exists to assume individual risks, pool them together, and hold enough capital such that it will be able to pay claims if those risks end up occurring.
Let’s use an example: term life insurance, the simplest kind of life insurance. Term life insurance pays your beneficiaries a certain amount of money if you die within the term of the contract. The insurer gauges how likely that is to happen and then prices a policy based on that estimation.
It’s no different with the Personal Pension. The Personal Pension is a simple kind of annuity. Annuities are basically the opposite of term life insurance. Life insurance pays your beneficiaries if you die. A life annuity like the Personal Pension pays you as long as you’re alive. The risk that the insurer assumes when they issue you a Personal Pension is the risk of longevity.
How Guaranteed is the Pension Guarantee Really?
You’ll see a disclaimer on our site and on the insurance company websites — the promise of the insurer is subject to its claims-paying ability. This is basically a fancy way of saying that as long as the insurer is in business, they are obligated to pay you exactly the amount each month that’s in your contract. Not a penny less. A good way to determine an insurer’s claims-paying ability is through its financial strength ratings. The pension guarantee of the Personal Pension, like all annuities, is not FDIC-guaranteed. That’s why the financial strength rating is so important.
Financial strength ratings are basically the same thing as credit ratings. The four largest rating agencies that rate insurers are: A.M. Best; Standard and Poor’s; Moody’s; and Fitch.
A.M. Best isn’t as much of a household name as the others, but it is well-known in the insurance industry and rates more insurers than the other three. Most large insurers are also rated by Standard & Poor’s. With Moody’s and Fitch, their coverage of insurers is a little more spotty.
The system each rating agency uses to assess insurers is complex and differs from one to the other, but there are some commonalities. All else equal, insurers will be rated higher the longer they’ve been in business, the more capital they hold to cover unexpected losses, and the more conservative they are investing the assets they do hold.
Financial strength ratings are important as you assess which insurer you want to provide your Personal Pension. But they are far from perfect. The biggest drawback of financial strength ratings is that the company getting rated is the one that pays for those ratings. This “issuer-pay” model creates an impediment to true objectivity. What should you do about it? First, look at as many rating agencies as you can. A.M. Best provides great coverage of the industry but look at the others too to get more data points. Second, you might want to look at a rating service, like Weiss, that is not paid by the issuers. Weiss is perceived to be more independent, but doesn’t have the same kind of staff and resources as the issuer-pay agencies. In addition, a rating service like Weiss only has access to publicly available information. Lastly, it’s a good idea to see how the State Guaranty Fund operates in your state. These funds exist to provide a backstop if any of the insurance companies operating in the state (and contributing to the fund) become impaired.
The Pension Guarantee is as Guaranteed as it Gets…
If you’re like us, life has probably taught you a valuable lesson by now: nothing in life is guaranteed. We certainly aren’t pretending otherwise! Instead, we like to say that the Personal Pension’s pension guarantee is as guaranteed as it gets. The future is uncertain, but something happening to one of the insurers on our platform is significantly less likely than you losing money in the stock market or you living longer than you expect. So, on the risk —> guarantee spectrum, the Personal Pension can’t be beat.
How Can I Start a Personal Pension?
A Personal Pension is a contract between you and top rated insurance companies. By making contributions to your Personal Pension over time, you develop a portfolio of guaranteed annuity retirement income available in retirement. Blueprint Income offers a Personal Pension account with the lowest minimum, $5,000. After opening an account, you can make subsequent contributions of as little as $100, each of which will increase your pension check.
Here you can see what contributing to a Personal Pension will guarantee you in annuity retirement income. After just a few years in retirement, you’ll have recouped your initial investment, and the rest will be profit.
You can continue with the enrollment process on your own or fill out the information to have one of our specialists follow up with you by starting with the Personal Pension Builder, where you’ll be able to set a goal for how to grow your pension over time. Note that all future contributions are optional, but it’s always great to have a goal.