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

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

For seasoned commentators like me, the Budget announcements come as a shock but not a surprise. 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 want to make three important points:

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

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

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.

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. Enhanced annuities also pay a higher income for those with reduced life expectancy.

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. An annuity can help achieve 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 about investing in drawdown is that 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 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, it 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.

If every cloud has a silver lining, it is when I hear commentators on national television discussing whether people will use their pension for income or blow it all 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 to make the right decisions because there is a lot at stake.

Billy Burrows is head of business development at Annuity Line

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