The Association of British Insurers recently issued a retirement income policy paper which calls for the Government to raise the age limit for buying an annuity or alternatively secured pension to 80. It argues correctly that since 75 was chosen as the latest age to buy an annuity, life expectancy has risen by about 10 years for males and females.
In 2002, the Government issued a paper called Modernising Annuities. It was largely ineffectual but it is useful as a guide to Government thinking on compulsory annuitisation.
It said: “The Government’s position is that the tax breaks offered to encourage people to save in pension funds are int-ended to help people achieve secure retirement income.” This is very much the mantra. The idea that excess retirement savings should be passed on as death benefits is anathema to the Government.
“The only reliable way of making sure that people do not outlive their pension assets is to use the fund to buy an annuity. It is a matter of judgement whether 75 is the right upper limit on the age for doing so. But there are sound financial reasons why people should find it good
value to annuitise by age 75, and often well before that.”
The sound financial reasons are largely driven by mortality drag or mortality cross-subsidy. People hate the idea they will buy an annuity and then die and the insurance company will keep their money. But what actually happens is that the insurance company passes that money on to those lucky enough to survive. The late Henry Allingham bought an annuity at 65 and enjoyed income from it for 48 years.
The Government Actuary’s Department figures show that while mortality cross-subsidy is worth about 1 per cent a year at 60 and 2 per cent a year at 68, it rises to about 4 per cent a year at 75.
The 2002 paper continues: “Since good financial advice would normally encourage people to annuitise pension savings some years earlier, setting the maximum age at 75 gives people some flexibility about when and how they fix the financial arrangements for their retirement income.”
For the vast majority of clients, annuities should be purchased before 75. Treating customers fairly means we have to make sure they understand the value of annuities. For a male of 70, the current rate for a single-life non-increasing annuity is 8 per cent, which looks very attractive in the context of deposit rates as low as 0.5 per cent or less. If a client has a genuine concern about his health, he will qualify for an impaired rate giving even higher returns.
The ABI is right to push for an increase in the age limit. For clients who are still working at 75, taking retirement income is a nonsense.
Equally, the very high-net-worth client should not be forced to annuitise or go into Asp at 75. But we must ensure if the age limit is increased, we as advisers do not lose sight of the fact that good financial advice means the change will only affect a very small number of clients.
David Trenner is technical director of Intelligent Pensions