Annuities will continue to develop: report

Annuities will continue to develop: report

The pension changes are likely to lead to a more sophisticated use of annuities in retirement income planning, specialist Billy Burrows has claimed.

In the 25-page Partnership-sponsored Retirement Intelligence report, The Case for Annuities: Their Role Within the new Pension Freedoms, Mr Burrows said annuities and their use would develop further in the wake of the reforms.

He claimed this would include the development of new products and the secondary annuity market proposed by the government, an increase in personal underwriting and improved understanding of behavioural aspects behind financial decision-making such as short termism and emotional thinking.

Article continues after advert

The report added that consumers could make more sophisticated use of annuities, and warned clients and their advisers would need to consider the amount of income required, the flexibility needed and how much risk should be taken.

Mr Burrows said: “In the past, many advisers and their clients thought of an annuity purchase as a black or white decision; smaller funds purchased an annuity and the larger funds invested in drawdown.

“This rather simplistic approach to retirement income planning should be replaced by a more sophisticated approach to annuities based on customer needs and wants.”

He also hinted that people could be losing out by delaying or avoiding an annuity purchase, saying: “When someone purchases an annuity they will be investing along with many other people.

“During the course of the year some of these people will die and the profit will be distributed among the other policyholders”.

Therefore, if someone invests in drawdown instead of purchasing an annuity they will not benefit from this mortality cross subsidy, the report said.