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‘A huge market overreaction’: Partnership hits back over Budget pensions overhaul

Partnership managing director of retirement Andrew Megson says the City “got it wrong” after the insurer’s share price plummeted over 50 per cent on the back of radical pension reforms announced during the Budget.

Last week, Chancellor George Osborne shocked the pensions industry when he revealed plans to fundamentally overhaul the UK savings system. The reforms mean that anyone aged 55 or over will be able to take their entire pension pot as cash from April next year.

Osborne’s bombshell announcement sparked a mass sell-off of shares in FTSE100 insurance companies. Partnership, which specialises in enhanced annuities, has seen its share price drop from over 280p per share before the announcement on Wednesday to just 125p per share this morning.

Megson says while the company is expecting a drop in the percentage of people who buy annuities, he also expects the overall size of the market to grow.

He says: “Whenever you get a surprise announcement like this you get a huge overreaction. But fundamentally if it was right for an adviser to advise his or her customer to take out an enhanced annuity product last Monday, we cannot see what has changed by this Monday except for the triviality rules.

“There is obviously going to be a short-term dislocation in the market as there always is with an announcement like this. As this bombshell dropped anybody who could read a paper was picking up the consumer facing press and saw complete freedom with no risk.

“Do we think the City have got it wrong? Absolutely and we are having conversations with analysts over the next few days. Clearly this came out of the blue and it was a shock to everyone, including the market.

“It will take some time to right that but our fundamental business is sound and we will just carry on.”

Megson suggests the experience of the US and Australia – where savers have more freedom over how they spend their pension pots and the annuity market is relatively small – is unlikely to be replicated in the UK.

He says: “People have been comparing the UK with the US and Australia but neither of those markets have had compulsory annuitisation.

“The concept of annuities is alien to those countries and so, while annuities are available, they have never really taken hold.

“Both Australian and US governments are distinctly concerned with customers running out of money. In fact, 35 per cent of people in retirement in the US run out of money.

“We think Switzerland is a better model to compare to. Compulsory annuitisation was in place there and accepted by the population. It was subsequently removed and now 80 per cent of people reaching retirement purchase an annuity by choice.

“We think that is quite a strong analogy.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. When interest rates rise and those in ill health can get abetter return for their pension pot then annuities may well be the best option until then ordinary annuities and depending on severity of ill heath enhanced annuities will not be the best advice as once locked in no way out.

  2. Someone could blow their pension pot in year one, and wait for nine years for their state pension to start.

    In those nine years they can pick up means tested social security.

    So the tax payer subsidises the tax relief on their pension contributions, and the social security.

  3. This was a disfunctional market that the Chancellor has acted to dramatically reform. An interesting way to regulate but firms in similar positions should watch out as this is a new and aggressive way to resolve an intractable problem. Why would anyone want to buy an enhanced annuity with all the inherent charges and ‘inducements’ when they can just take their money and invest it as they will? I think it’s time to ‘wake up and smell the coffee.’

  4. People can choose. If they want to give away their money for a trickle of income they can do.

  5. Yes Ken, people can choose – in the same way they could choose to buy PPI from banks and choose to opt out of statutory final salary schemes and switch their holdings in personal pensions?

    You and I both know that a lot of people will choose short term gain at expense of more sensible long time financial planning. I’m just wondering why a Chancellor, who normally seems to be so keen to reduce the burden on the taxpayer, is quite happy for us taxpayers to pick up the bill for people who choose the short term option and run out of money?

    Anthony – some people might still opt for the Enhanced Annuity if they know that the income is for life and, unlike the value of investments, is guaranteed not to go down.

  6. Very sensible comments Smithy0364. As you point out when it comes to personal finance choice is not always a good thing, in fact I would go as far as to say that is often a bad thing.

    Clearly for most people drawing out their entire pension pot in cash and blowing it on fast cars on holidays will be a very bad thing. Unfortunately this will happen.

    Anthony, I would very interested to hear what you would suggest by way of investment as a safe and viable alternative to an annuity or draw down plan. Bearing in mind that many of these retirees will very much need regular income for life.

  7. As ever the Devil will be in the detail. I just cannot believe that a responsible Government would allow people to sqander their pension and then rely on State handouts.

    How ill this work for DB schemes? Just imagine this scenario:

    A public employee with a DB scheme and 20+ years service gets the employer to provide a CETV. He then sees a pot of money beyond his wildest dreams. He blows it within 3 or 4 years and then goes on benefits.

    The private sector taxpayer has in effect funded his pension for the past 20 years or so and will now fund his benefits till he dies. This is not a sustainable economic model – even a 12 year old can see this.

  8. If anything, this change of thinking by the Government will increase and not reduce their coffers. When an annuitant dies, the annuity dies with them – so the funds go to the annuity provider and not the Government.

    In the new world, if someone takes the full fund then 25% is tax free which is the same now. The rest is taxed at their highest rate, although I would assume the vast majority will be at 20%. So that is 20% directly to the Government already which they wouldn’t have. If they then spend the remaining fund, this is likely to go on goods that are VAT’able, so a further 20% to the Government on the spending. Not to mention the boost the economy will receive for all the additional spending. If this increases the economy, it is likely jobs are created increasing further taxable income.

    Anyone that has funds left, then these funds on death now form part of their estate. Potentially subject to a further 40% tax charge. So potentially, the Government has just gained 20% initial tax, 20% VAT and 40% death tax. Compare this to the amount of income tax they would only receive from the annuity income.

    I would think in the long run, the more people that do take and potentially blow their pension funds the happier the Government will be.

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