Opinion  

Reports of annuities’ death are greatly exaggerated

Jon Cudby

“No one will have to buy an annuity.” With those eight simple words, tucked away late in an already uncharacteristically eventful Budget speech, George Osborne changed the face of UK retirement planning and sent the entire pensions industry into turmoil.

Of course, as many drawdown providers were quick to point out, nobody has to buy an annuity now. There are other options and, as I have argued before, the introduction of advice at the point of retirement - a footnote to Osborne’s broader change - goes a long way to solving the problem that the chancellor is trying to fix.

Without that advice however, few are aware of drawdown and even if some of the responses to the announcement bordered on hysteria, the change to the man on the street’s understanding of what a pension is will be seismic.

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Typically the response of many was to worry about what people would do when given access to their entire pension pot in one go. As if it is not their money in the first place and they shouldn’t be entitled to waste it if they like.

The logic behind this reaction is based on the most patronising view. Apparently the people who were responsible enough to be putting a little away throughout their lives in the hope of a comfortable retirement cannot then be trusted not to run amok, frittering away their fortune on Dr Scholl sandals and Werthers.

The removal of the need to buy an annuity simply means pensions will now be treated as what they are: tax-efficient investment vehicles that just happen to have a specific purpose. The money at the end is no more likely to be treated as a windfall than profits from any other investment.

People will be given access to the cash at a point when they will need to be planning how to fund the next phase of their life. Faced with increased longevity and insufficient state pensions, they are hardly likely to take the lot and put it on a horse.

Even if they were tempted to, the imposition of advice, or ‘guidance’, or whatever semantics the government finally settles on, should make sure they are not too rash.

At the time of writing it is unclear what form this guidance will take. Ideally it will involve qualified advisers, but even the worst case scenario of the Money Advice Service would encourage people to improve their lot.

The other major downside was the hit that the share price of any company involved in annuities took in the immediate aftermath of the Budget. Traditional life offices suffered huge falls; Legal & General alone saw over a billion wiped from its value in hours. Partnership meanwhile fell by 55 per cent by close of play on Budget Wednesday

In truth though, these firms, however old and unwieldy, will have enough other business interests to survive even if annuities disappear from the retirement landscape. This reaction looks more than a little knee-jerk. There will still be annuities and all of these companies offer the sort of enhanced deals that still look attractive, along with equity release and whatever other retirement solutions they can come up with in response to the announcement.