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Who really needs an annuity?

A few weeks ago, you ran an article in which certain industry commentators suggested that most of the IFA market is unjustly biased against lifetime annuities and is failing to wave the flag for them as enthusiastically as it ought to. The lifetime annuity, they claimed, is really a great product, the virtues of which IFAs ought to be doing far more to promote to their clients.

First, we should bear in mind that the two principal defenders of the poor downtrodden annuity were Peter Quinton of The Annuity Bureau and Tom McPhail of Hargreaves Lansdown, a company keen to attract as much money as possible into its Vantage Sipp. Neither of them, I suggest, is a totally disinterested party.

Second, it seems to me that a more balanced view of annuities might be arrived at by comparing their good and bad points. First, the good points:1: Once purchased, a lifetime annuity is guaranteed for life.2: There is no good point number two.

Now the bad points:1: Annuity rates are terrible and unless interest rates climb back to the sorts of levels we saw in the 1970s and 1980s, are predicted to continue to deteriorate, steadily and indefinitely.2: Annuity rates are severely age-dependent, unlike just about any other type of income-generating investment you care to name.3: The impact on the initial amount of annuity of installing even a very modest level of inflation-proofing is so severe as to deter all but the most lavishly well funded prospective annuitants.4: Once purchased, a lifetime annuity can never be changed or transferred to another provider (although this seems to be under consideration somewhere within the bowels of the Treasury) to adapt to the changing circumstances of the annuitant, for example being widowed or suffering a deterioration in health. Once the annuity deal has been struck, it is carved in granite.5: Unless you enjoy a long and healthy retirement, the best value you can expect to achieve from an annuity is for it to be payable for a minimum of 10 years and throughout life thereafter.6: Purchase of an annuity means giving up all capital that might otherwise pass on to the next generation.7: Annuities are assessable for tax as earned income and can impinge on any agerelated tax allowances and/or means-tested state benefits. About the only breath of relief is that the first £9,030 of assessable income falls within the current personal allowance for those in the 65 to 74 age bracket.

Now compare this with the benefits of Isa investments ~ tax-free income, retention of capital, reasonable prospects for a gently rising income stream over the medium to long term, freedom to restructure one’s portfolio from time to time, income that does not impact on any means-tested state benefits (although the capital could).

Annuities? Who wants one? An ever increasing number of people manifestly do not.

But the Government refuses to accept the problem, much less enable the industry to address it by allowing the design and creation of a sensible and understandable range of alternative retirement income vehicles.

Never mind. As civil servants, their pensions are totally secure, index-linked and fully guaranteed.

Julian Stevens
Harvest IFM


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