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Sense of the dynamic

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The announcement that the effective compulsion to buy annuities at age 75 has been removed caught me by surprise. There have been so many false dawns over this issue that I thought, despite the coalition rhetoric, the change would come about in a second Parliament.

I use the words “effective compulsion” wisely because the last time I wrote about the age 75 issue, a very eminent commentator quite rightly pointed out that since Asp was introduced in 2006, it has been no longer compulsory to buy annuities.

However, the rules for Asp must rank as some of the most poorly thought out rules ever. The problem is that when the policyholder dies, unless there is a surviving spouse or dependant under the age of 75, the remaining fund cannot be paid as a lump sum to other family members without being taxed at 82 per cent. It can, of course, be paid free of tax to charity. This also applies to those taking scheme pensions.

The debate about annuitisation at age 75 is not really about income from pension pots, it is about leaving lump sums to the family. To be sure some investors argue that annuities pay a relatively low income and they can do better by taking drawdown income but this is rarely the case. In most cases, the reason not to buy annuities at age 75 is the desire to transfer the pension capital to the next generation.

So, how will the changes affect the advice from IFAs and how will this effect customer behaviour?

Annuities secure a relatively high level of guaran-teed income and drawdown provides flexi-bility and control

We will not know until the new rules are announced but provided the tax on any lump sum left to the family is less than, say, 50 per cent, I think many advisers and their clients may be tempted to run the risk that they will not get the same income as they would have obtained from an annuity purchase in return for the greater of flexibility of the new post-75 regime.

My hope is that advisers and their clients will quickly realise that for most people in retirement there is a strong argument for annuities and a strong argument for drawdown. In simple terms, annuities are the best way to secure a relatively high level of guaranteed income and drawdown is best at providing flexibility and control.

As most people want the best of both worlds, the issue should not be either or but what combination of each. I have written about this for the last 10 years and I advocate a dynamic portfolio of draw-down and annuities.

The dynamic part is that an investor can reduce risk and increasingly guarantee income by purchasing annu-ities as they get older and their objectives and risk profile changes. Within this portfolio, there is an important place for flexible annuities, fixed term annuities and variable annu-ities (unit-linked guarantees).

Billy Burrows, Director
The Retirement Partnership

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