News Column

Public urged to rethink annuities for retirement income

June 14, 2014

HELEN PRIDHAM; HELEN PRIDHAM

PEOPLE who want a secure income in retirement are being urged not to dismiss the idea of buying an annuity. Sales of annuities have plummeted since the Chancellor's announcement in the Budget that pensioners will be able to take their entire pension pot as cash from April 2015.

Research by annuity provider Partnership found that the most popular choice (36 per cent) among those surveyed was to put it into a bank and use it "as and when I need it". Almost a quarter (23 per cent) would look to buy an income generating asset such as property while others would invest in stocks, shares and collective investments (14 per cent).

Many people don't understand the benefits of annuities, says David Trenner, technical director at Intelligent Pensions in Glasgow. "Everybody has been told that annuities are bad and yet, if asked, most people say they would like a guaranteed income for life. This is what an annuity provides, it is an insurance policy against living too long.".

There are a variety of factors which people will need to take into account when deciding whether to buy an annuity or not. Douglas Baillie, managing director of Perth-based Comparemypension.com, points out: "Annuities are good for people who don't want to take risks with their retirement income. If you want to take control of their pension pot you have to be prepared for volatility in your income and capital. You can't have it both ways."

In the past, many people have received a poor deal from annuities because they have not shopped around. But annuities can still provide competitive returns, says Tom McPhail, head of pensions research at Hargreaves Lansdown.

"Take the example of a man of 67 with a pound(s)40,000 pension pot, who is a smoker, doesn't own his own home and does not regard himself as financially sophisticated, which is not atypical of most of the population. He would currently be able to get a 7.4 per cent annuity rate guaranteed for life.

"I would struggle to justify not recommending that such a person buys an annuity" Mr McPhail says.

Advisers are not suggesting that annuities are right for everybody. Mr Trenner says: "I expect that people with pension pots of pound(s)30,000 or less will take the cash. It's difficult to get good value from an annuity with a sum of that size and the cost of getting advice is too high. People with pension pots of between pound(s)30,000 and pound(s)100,000 may still be best off buying an annuity, while people with larger amount will probably take income drawdown."

Income drawdown is likely to become more prevalent. It allows you to leave your money invested in a pension fund and take regular withdrawals when you need cash. The advantage of doing this is that your money will remain in a tax free fund and it allows you to minimize the rate of tax you pay on the cash you take out.

People who take the money out of their pension pot in one lump sum could end up paying higher rate income tax on anything which exceeds the 25 per cent tax free allowance. If the amount they want to invest exceeds their ISA allowance, they will also have to transfer their savings into a taxed environment.

However, Mr McPhail is concerned some pension providers may use income drawdown as their default option instead of annuities in future. He said: "It is easy and seductive to say to people they can leave their money invested where it is, free of tax and draw out the money when they need it. But drawdown is not a low-risk proposition. Investors could find their pension pot halves in value in five years if market conditions deteriorate."

Advisers stress buying an annuity does not need to be an all-or- nothing decision. Pensioners can mix and match. Mr Trenner explains: "It may be a good idea to use, say, half your pension pot to buy an annuity so you have a guaranteed amount of income to cover your bills and invest the remainder elsewhere."

Stuart Dunbar, at Argyle Consulting in Glasgow, said: "Annuities have received a bad press lately because of poor rates - a consequence of low gilt yields and the UK experiencing the lowest interest rates for 300 years. As market conditions begin to normalise, an annuity for people who are risk-averse might be a good idea. The Budget announcement made it even more imperative to seek professional advice."

The government this week closed a consultation on its Budget proposals, crucially on how its promise of free guidance for all retirees will be delivered.

People who do decide to buy annuities are more likely to shop around in future, following a drive by the regulator to ensure people do not take their annuity from their existing pension company without checking how competitive it is.

But the excessive profits insurers make from annuities, as well as the hidden commissions earned in all online sales, are yet to be curbed. It is also possible that, with lower sales and a smaller market, the rates offered particularly on enhanced annuities for those in poor health will come down.


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Source: Herald, The (Scotland)


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