Annuity death calls are premature

7th August 2014

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Reports of the death of the annuity following the surprise pensions leap to freedom in the budget this spring may be premature – or downright wrong.

That’s the hope of investors in a series of life and specialist retirement income companies – the latter have been especially hit with Partnership, which focuses on annuities for smokers and life-shortening conditions, down from a 12 month high at 493p to 127p now – a collapse of nearly three quarters. Partnership is due to publish trading figures next Thursday – holders hope for a glimmer of good news.

They could take a pinch of comfort from Friends Life which has turned down requests from analysts and substantial shareholders to move out of writing new retirement income business. Chief executive Andy Briggs sees a “complementary benefit” in both running old plans and chasing new ones.

It has lost annuity sales volume – in common with other providers – since the budget announcement but whereas some have seen new plans slump by a half, it has only lost six per cent, suggesting a measure of “wait and see” among those nearing retirement. Analysts also attribute the relatively small downside to Friends paying better rates than most.

It is now up to Friends and rivals to come up with new ideas to deal with the new retirement reality.

Briggs says: “We believe that the biggest area of growth going forward will be in the ‘flexible income’ space.

“Those customers that decide not to buy an annuity will want much simpler propositions, so that they can take a regular income from their accumulated pension and other assets. In particular, they will want to do this in the most tax efficient way, and hence a proposition offering both a pensions based vehicle alongside an Isa, and ensuring tax efficient switching between the two, will be key.”

Andy James, head of retirement planning, at advisers Towry, also remains unconvinced the annuity is dead. He believes that once retirement income seekers take the tax charges into account – up to 45 per cent of a pension pot could disappear into the Treasury – and the long term implications involved in betting against living a long time than expected, consumers will come back to some form of annuitisation.

He says: “Despite the Chancellor stating his intention that most retirees would no longer need to purchase an annuity at some stage in their later life, it remains my belief that they still have a place in people’s retirement plans. It was therefore very interesting to read David Blake’s discussion paper on behalf of the Pensions Institute entitled ‘The consequences of not having to buy an annuity.’

“He makes the very good point that the planned changes will transfer greater risk to the retiree and away from the insurance companies who provide annuities. With risk, in most cases, already having been transferred to the individual in the accumulation stage following the demise of final salary pensions, this further transfer in retirement could prove a problem. This is particularly true where the individual fails to understand the complexity of what they are being asked to do. There are many variables that come into play at retirement and all will affect future financial plans. These include investment returns and the pattern of those returns, as well as inflation and most importantly how long the retiree and their dependants are going to live. Whereas with an annuity purchase, all these risks are taken on by the insurance company – something they can do by pooling many investors – it is much more difficult for the individual to do so with any level of certainty.”

If nothing else, he says life has so far increased by two years for every decade – so someone with thirty years before retirement can expect to live six years longer. But this is not “guaranteed”.

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