Life after annuities

Annuities have never attracted as many newspaper headlines as they have recently. First the review by the industry regulator, the Financial Conduct Authority, reported in Feb 2014 that – as many critics had thought for years – most people weren’t getting best value from their incumbent pension provider and would be better off shopping around.

Then came Chancellor George Osborne’s new rules threatening the annuity market as he introduced a series of tax changes, effective in 2015-16 increasing access to pension pots and reducing taxation which meant that ‘no-one will have to buy an annuity.’ Meanwhile, in the 2014-2015 tax year, the minimum income requirement is cut from £20k to £12k and other drawdown allowed up to 150% (was 120%) of ‘GAD’ benchmark annuity.

Annuity rates have halved in the last 10 years and whole historically seen as the main option, providing a steady and reliable income in retirement, the returns are low and a long survival is usually needed in order for retirees to regain their investment. Hence the FCA review which found 80% people who bought an annuity would have been better shopping around and buying one elsewhere, referred to as the ‘open market’ option which supposedly would have given an average of 10% higher than their existing provider.

While very wealthy individuals have taken advantage of income drawdown options for years and low earners will likely rely on state benefits, those in the ‘middle’ will likely face the biggest-ever change to their pension arrangements. They now have more choice. This is only a good thing if you make the right choice – the need for advice is paramount.

Whilst buying an annuity is no longer mandatory, they may still be the right choice for some. They exist in many different forms, such as investment-linked, joint life and impaired life or enhanced annuities (which may be appropriate if you have a particular health condition or are a smoker). Variable (or flexible income) annuities may grow in popularity as savers still want a level of security but don’t want to lock in income levels, but these introduce greater investment risk.

It’s important to remember that annuities are now just one option and with an increasingly varied landscape to navigate, we urge you to seek out good financial advice.