PensionsOct 23 2014

AIC heralds move from ‘annuity or not’ retirement planning

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The real benefits of the pension reforms are that annuities will no longer be the default product and that financial planning in retirement will now be “tailored” and include a whole range of options outside the traditional at-retirement sectors, Ian Sayers said.

A blog by the Association of Investment Companies’ director general published today (23 October) compares the at-retirement decision making process as akin to pondering the ‘allow substitutes?’ box when supermarket shopping online.

He suggested that the real benefit of the pension reforms are that financial planning in retirement can now be tailored, rather than just ‘annuity or not’.

“Trawl the internet, and you will be regaled with stories of inappropriate choices made by those tasked with making these crucial decisions,” he stated, noting the case of one customer who ordered chicken wings, only to have them replaced by an equivalent number of whole chickens.

“So whether you can live with an alternative not only depends on how much it differs, but also how important those differences are to you.”

This comparison was made to highlight the retirement income options available, including for example investment funds in the UK equity income sector, which Mr Sayers argued represents “an appealing alternative to an annuity” if the consumer is not desperate to maximise income in the early years.

“After all, your £100,000 would have returned £113,664 in income over 20 years, would be yielding more than 8 per cent on your original investment, and your capital would have more than doubled to £222,315.

“But if a higher immediate and totally secure income is your priority, then investment companies simply aren’t for you.”

Mr Sayers conceded that a person retiring 20 years ago and purchasing a level annuity would have received an annual income of £11,500, adding that even income of £230,000 is less than the total profits made by the UK equity income sector of £235,979.

“But I can’t help feeling that, if annuities were still offering 11.5 per cent, then most of the reforms we have seen in the last few months would never have materialised. And it still wouldn’t help someone, and there are many, who see the ability to hand on assets after death as a priority.”

He concluded: “To put it another way, its horses for courses. Which reminds me to tick the ‘no substitutes’ box the next time I order lasagne online.”

peter.walker@ft.com