Should retirees be advised to raid their annuities?

It holds out the possibility of a reverse gear that no one in financial services nor their clients and customers thought they had. Chancellor George Osborne believes that by amending the tax rules, a new market will emerge that will allow many more people to take advantage of the freedom and choice in pension reforms.

But does it mean anything for investment advisers and their client bases?

Clearly most advisers I speak to believe that freedom and choice are brilliant for their clients. They are a little more sceptical about the middle market and below, and I tend to be in that camp. I would also caution against the suggestion that people with small pots might as well take the money. One man’s or woman’s small pot may well be somebody else’s substantial savings.

Indeed, this may also apply to the broader in-payment annuity market. Were such a secondary market to arise, the decision ought to be based on a very careful consideration of the numbers.

Andrew Tully, pension expert with MGM Advantage, says his calculations suggest that as much as 30 per cent of the value would be destroyed in the process. Of course, people will be comparing a lump sum with a regular annuity payment, so they may not appreciate the extent to which value has been eroded.

The decision is made more complicated by considerations about benefits too. It is clear the state will not make up the difference for those who have blown their annuities. Intriguingly, it may complicate the picture for the non-retired population too, so Lamborghini may have to scale back those sales targets.

Some may not have need for the annuity with the benefit of knowing exactly what their outgoings are in retirement

Of course, a retiree might have debt to pay off, which might suit them to deal with in one go, to remove that psychological burden, particularly if their annuity is mostly being used to service it.

Some may not have need for the annuity with the benefit of knowing exactly what their outgoings are in retirement. They may even have kept working, having found a second late career as, who knows, a thriller writer.

They may have gone safety first but have now decided they don’t really need to. Perhaps their spouse has passed away.

Yet even in these circumstances, the question for advisers may be how credible is the option of taking money from the annuity ‘resale’ and placing it back into some form of drawdown contract, presumably partly to manage the income tax applied.

Well, if you start your drawdown contract – 30 per cent down, as per Mr Tully’s suggestion – that will feel like a stockmarket collapse without the market collapsing.

Similar calculations will surely apply to buy-to-let purchases as well.

So is this a possibility for a small number of clients? We probably won’t quite know until 2016, when advisers get to see the sort of cases to whom this may apply.

Yet I wonder if the best advice will almost always be to leave well alone.

John Lappin blogs about industry issues at www.themoneydebate.co.uk