ANNUITIES
New pension rules offering greater freedom and flexibility may not turn out to be
the stake through the heart of annuities that many experts had been predicting,
writes Pádraig Floyd
T
he recently implemented
pension reforms announced
by chancellor George
Osborne in April 2014 were said to
have signed the death warrant for
the unpopular annuity market.
However, just as Mark Twain
once corrected an infamous rumour
about his own demise, so we can
confidently state that the reports
of the death of the annuity market
have been greatly exaggerated.
A recent Hargreaves Lansdown
survey of a thousand people found
that half would not use any of their
pension money to buy an annuity.
However, the other half said they
would choose an annuity for part of
their income, with 10 per cent using
all their pension on an annuity.
Three in four (75 per cent) of those
surveyed said a guaranteed income
that would not run out was either
quite important or very important
to them.
IT AIN’T OVER YET
This shows that despite the
hyperbole about the annuity market,
many savers will choose the security
of an annuity product, says Tom
McPhail, head of pensions research
at Hargreaves Lansdown.
“Savers require three things
from their retirement income –
flexibility, guaranteed income and
comparatively good investment
returns,” said McPhail. “However,
you can only ever have two out
of three of these things at any one
time.”
Investors will therefore place
security above flexibility and access
in order to have a degree of certainty
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over their income stream.
McPhail says the greatest
enthusiasm for withdrawals is
among those in their mid-to-late 50s
dipping into cash for a car/holiday/
kitchen, but he believes those in
their 60s and beyond will buy some
annuity and stay flexible with the
rest.
Even that 50 per cent who rejected
an annuity may reconsider in later
life: “They may think about it in
their 70s,” McPhail continued. “If
the trend of market uncertainty and
risk continues, it may lead them to
believe they need a lock-in.”
Andrew Tully, pensions technical
manager at annuity provider
MGM Advantage, fully agrees with
McPhail’s assessment: “People don’t
like taking risk, especially in later
life. Most people want money in the
bank just like a salary every month,
because it is what they are used to.”
Tully says the new ability of
pensioners to pass on their savings
to their family is the component
of flexibility that consumers want
most of all.
Although the term annuity has
become unpopular due to the
low levels of income the products
generate in the current economic
environment, an annuity remains
the best way to provide a guaranteed
income, if people can just get over
the word.
The demand for annuities has
encouraged MGM to launch a new
version of its existing product,
which it calls a money-back annuity.
This pays out for up to 30 years at
age 65, by which time the investor
will have got their money back.
As for the annuity market being
dead, Tully completely rejects this
notion. In fact, he expects the market
to continue in much the same way;
in 2014, for example, mo ɔ