Pensions  

US and UK divided over annuities

The director of international consultancy Buck Global Investment Advisors said the US pension market was undergoing “rapid change”, especially for those saving through 401K defined contribution pension plans.

The Atlanta, Georgia-based pension specialist said concerns over retirement readiness and longevity risk had led the US Treasury to issue new guidance in 2012 to promote the use of annuities.

He said: “While lots of DC savers rollover into individual retirement accounts, investing in products such as mutual funds, historically, few people have annuitised their savings as people have done in the UK, especially those with small pension pots.”

With the lack of engagement in the US equivalent of individual annuities, he added that the pensions market had innovated and launched products, including longevity insurance and deferred annuities, which use a variable payment structure instead of a standard annuity’s fixed payouts.

He said: “Maybe the US has been too far on the no-annuity side, while the UK has been the opposite.

“The best option would be a balance between the two, which is currently hampered by terrible annuity rates.”

Background

Mr Bowden’s comments followed analyst reaction to the chancellor’s announcement of the liberalisation of annuity rules, which warned that the UK individual annuity marketplace could become as insignificant as its US counterpart.

The Barclays analyst note said the UK annuity market could shrink by two-thirds, from £12bn to £4bn a year within the next 18 months, with the shortfall being lost to Sipp and drawdown products.

Adviser view

Keith Macdonald, certified financial planner for Worcestershire-based Broadway Financial Planning, said: “I think we will see more innovation in the UK, but with an annuity as the base. “Annuities can lock-off longevity risk, and I still think they have a role to play as part of a combination of products.”