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Billy Burrows: The Budget does not herald the death of annuities


Some commentators have described the increased flexibility for pensions announced in the Budget as sounding the death knell for annuities. Far from it, I see a good future for annuities but in a different market to that of today.

For seasoned commentators like me, the Budget announcements come as a shock but not a surprise. The Government has ended the long standing principal that a pension should pay a regular income for life – something that was set in stone by previous policy makers. However, there is little surprise that radical change is here because the current annuity bubble had to burst at some time but nobody thought it would burst in such a grand style.   

In defence of annuities I make three important points:

  1. Annuities will continue to be the only policy that can pay a secure income for life
  2. The grass always looks greener on the drawdown side of the fence but rarely is
  3. Although it will be possible to take the whole pension pot as a lump sum it is both tax inefficient and financial imprudent.

The case for annuities can easily be made by asking what would happen if there were no annuities?

Instead, investors would be faced with very difficult choices; withdraw too much income from their capital and they will run out of money but take too little and they will die without enjoying the income they could have had. There is also the problem of where to invest the capital.

Annuities solve these problems by providing the optimum distribution of income over the lifetime of the annuitant with valuable safeguards should they die earlier than expected. Also the enhanced annuity option pays a higher income for those with reduced life expectancy.

More importantly annuities meet the needs of those who want a sustainable income for life, to provide an income for their partner if they die first and to have peace of mind and security. An annuity can help achieve all of these objectives in a way no other policy can.

Many people think the grass is greener on the drawdown side of the fence but it often is not. The main concern for worrying about people investing in drawdown is most people do not understand the risks and unless there is sufficient capacity for loss, pensioners can suffer a material drop in their standard of living if the drawdown does not perform as planned.

Finally, although people will have the flexibility to take all of their pension as a lump sum, as soon as they realise the tax consequences they will quickly appreciate the advantages of keeping their tax bills down.

In conclusion, is too early to predict the end of the annuity market. My prediction is that although the volumes of annuities purchased in the future may be less, the quality will be much higher. By taking away the burden of the small pots the industry will able to focus on providing better value and more choice for those with larger pension funds.

Investment-linked annuities should be an important part of future annuity solutions, possibly as an alternative to drawdown for those who seek a less complex and less risky solution.

There will clearly be a bigger demand for drawdown in the future but as people get older they should be taking less risk not more. Mortality drag increases the risk of drawdown for older people so it might make sense to invest in annuities at older ages.

If every cloud has a silver lining it is that when I hear commentators on national television discussing whether people will use their pension for income or blow it by spending it on a Lamborghini, it is clear that talk about pensions has moved from the stuffy offices of pension professionals to the real world.

In the end we must hope that the industry will be able to help people make the right decisions because there is a lot at stake. Get it right and our clients will have a better retirement income, but get it wrong many will face a financially constrained retirement.

Billy Burrows is head of business development at Annuity Line

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There are 10 comments at the moment, we would love to hear your opinion too.

  1. Once again Billy Burrows is talking sense. Retirement income specialists could be the future for advisers.

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  3. As a recent pensioner, there’s one thing I don’t understand about this new scenario: why would anyone buy an annuity if they don’t have to, as their capital is gone forever? Are the rates of return, guarantees etc. for an annuity so much better than an investment where one’s capital is retained, to make its loss worthwhile? It doesn’t look that way to me.

  4. Michelle Cutler 21st March 2014 at 3:54 pm

    Couldn’t have said it better Jennifer. I think it depends on the kind of annuity you bought Richard. For many enhanced annuities the rates of return and elimination of longevity risk are good value for money for customers. The new flexibility will give advisers the ability to recommend a combination of options to give customers secure income as well as flexibility in whatever measure of each their needs are.

  5. @Richard L

    You make some interesting points, but also some rather bold assumptions. You say an investment where “one’s capital is retained”. True enough, but it is only retained if investment markets perform, a re-run of credit crisis could see a very different picture. Alternatively you use a safe haven like cash, but that is unlikely to provide a better income than an annuity.

    For many, the safety net of an annuity, which gives peace of mind is preferable to the uncertainty of a drawdown or another similar investment. It is human nature that people worry, they certainly worry about running out of money in retirement. I think you would find an awful lot of pensioners would prefer a guaranteed income of something, than the possibility of nothing in their latter years if they live longer than anticipated.

  6. This article is typical of the head of business development at an annuity provider. Ah Billy have just seen your job title !!!

    I have to agree with Richard. In fact, anyone who has had the determination to accrue a decent size pension fund is likely to have the determination not to blow it all in one go. The majority of pension funds held in money purchase plans, I would imagine, are quite small. Multiplied by an appealing annuity rate will hardly set the party in motion. Admittedly, there will be a small percentage of people who will waste their money, but it does favour the majority of people, who will be able to make their own decisions without the worry that the annuity provider can claim their hard earned savings upon their demise. For the average size money purchase pot it shouldn’t take the average pensioner too long to get their funds into an ISA, with the increased allowances anyway. Unfortunately, when I reach state pension age I bet the annuity will be back so instead of my lambourghini I’ll be having a second hand Ford Ka with my annuity barely covering my insurance! !!!

  7. I am talking about a fair sized pot, which for me would have been enough, with a little topping up, to buy a decent residential rental investment. Which would still belong to my estate when I die.
    I’m not knocking what I did with my pot, given the rules at the time, but the changes, which will be great for new pensioners (sensible ones anyway), will create an enormous unfair discrepancy. I can envisage groups getting together with small pension pots to invest in property portfolios, now the residential sector will be open to pension money investment. That will pressurise the housing market even further, with the usual rent/market value cycle being distorted even more than it has been since rental control was removed.
    Financial advisers will undoubtedly need to get some residential specialist (preferably Chartered Surveyor) input into their game.

  8. “Annuities solve these problems by providing the optimum distribution of income over the lifetime of the annuitant with valuable safeguards should they die earlier than expected”
    Unfortunately Billy they also create the biggest one of all – the loss of the capital sum in the event of early death. No other single factor dissuades as many people from taking an annuity; and even joint annuities and the peace of mind they bring does not compensate – after all drawdown options for surviving spouses offer a choice, always an advantage.
    I agree there is still plenty of room for the annuity option in the retirement market and not just for those who intend to live to 120. Essentially they will be there for very nervous investors but at the moment drawdown looks even more attractive than it did.

  9. Thank goodness this institutional theft of workers’ money has been stopped. Next step, those who have been forced to buy an annuity – to get their money back.

  10. Well, if only life were that simple.
    There is no question whatsoever the budget is good for Mr and Mrs Miggins and bad for annuity providers. The profits made from small funds were at the expense of Mr and Mrs Miggins and letting them have their £15k they have saved hard for 15 years for is actually a very left wing thing to do; perhaps that’s why Labour have not opposed these radical changes.
    Billy is of course right, no other product will give you a guaranteed income for life (provided the annuity provider does not go bust that is and of course the FSCS can pick up a multi-billion pound compensation bill, now picking that one would cost the IFA world a few bob!) but ask just one question, with billions, possibly trillions of pounds sitting with the over 55’s in the UK, how much of that is invested in purchase life annuities? What does that tell you?
    But you know what; if I were diagnosed with heart disease I would like to enjoy what I could when I could and if there was any left leave it to the kids. That to me is better than helping with an annuity provider’s mortality drag.

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