To a large extent flexible annuities were ahead of their time prior to the recent pension freedom changes. Flexible annuities allow clients to review and change their annuity as their circumstances change.
They provide a lifetime income without a lifetime lock-in, and should a client’s health deteriorate or annuity rates change, they could review their income accordingly even on enhanced rates. The income is investment-linked and therefore still carries an element of risk, but creative use of underlying guaranteed funds will help to mitigate this. There is also the ability for clients to switch out to a conventional or enhanced annuity at any time.
April saw the introduction of the new pension freedoms, confirming the government’s belief that those individuals who have worked hard and saved responsibly throughout their adult life should be trusted to make their own decisions with their pension savings.
This legislation has not only brought about some of the most radical changes the pensions system has seen for almost 100 years, but it has also left the new pensions landscape totally unrecognisable when compared to its predecessor.
Retirement is one of the most important life stages which everybody will have to save for, and what to do with those savings when you retire is one of the biggest financial decisions that anyone will have to make throughout their lifetime.
Prior to the new legislation only those with a pension pot typically exceeding £310,000, or total pension wealth under £18,000, could access their pension savings flexibly. However, with the introduction of the new pension freedoms everyone is now entitled to ‘flexibility’, no matter what their total pension wealth.
Today’s pensioners now have access to a range of additional options, all of which can provide a suitable alternative to a traditional annuity.
While annuities still remain an option for those who may still wish to purchase one, they are thankfully no longer a ‘compulsory purchase’ as there are many potentially more suitable alternatives now available – such as cashing out the entire fund all in one go, subject to income tax at the client’s marginal rate.
For those who do not wish to purchase an annuity or to withdraw their money all in one go, instead preferring to keep it invested to be accessed over time, the purchase of a drawdown product – such as capped drawdown and flexi-access drawdown – are also available options.
However, ever since the Treasury first announced its planned introduction of the new pension freedoms, the reception they have encountered, perhaps somewhat predictably, has been mixed.
Whereas many approaching their retirement will no doubt have welcomed the forthcoming introduction of the ability to access their money to be able to do with as they wish – as opposed to being forced into purchasing a poor-value annuity paying a pitiful rate of return (not to mention the total loss of any fund remaining upon death) - others within the industry have cited the risk of irresponsible behaviour.
One such notable example that received wide coverage in the media was the ability to potentially ‘blow the lot’ on the purchase of a Lamborghini, and in so doing leaving the state to ‘pick up the tab’ over the longer term.
Now although the initial reports available since April’s introduction of the new rules may seem to indicate that the exact opposite is true, everything is still far from straightforward.
Despite the new pension freedoms rules being firmly in place, many savers are now discovering for themselves that gaining access to their cash is not as easy as they were initially led to believe – nor is it guaranteed.
The main problem is that many providers are simply just not set up to be able to make the requested payments, and with complications inherent in their systems processes leaving them unable to cope with such requests, are simply ‘dragging their heels’ when it comes to paying out.
Likewise there is also a concern that most large pension providers and insurers will simply refuse to invest in the new technology required to be able to implement the changes necessary to their legacy pension books, and so will continue to struggle when it comes to offering any cash-out facilities to their pension clients.
Having said that though, when you bear in mind the additional expenses incurred in order to be able to do so, and for little or no return on their investment, they could perhaps be forgiven.
One recent example of this is the decision by Friends Life to do a complete U-turn with regards to its offering of flexi-access drawdown, citing the ‘complex nature’ of its pension book preventing it from being able to continue doing so.
Not only was this decision not particularly well received by its policyholders, but even the government became involved, with the new pensions minister Baroness (Ros) Altmann prompted to comment that she found it “disappointing that even the larger pension companies are not allowing their customers to take advantage of the new pension freedoms that the government has introduced for them’.
In fact there are also concerns that while many millions of savers may still be being prevented from accessing their retirement cash freely, those who are able to do so are being hit with long delays and higher additional charges – charges that in some cases are slashing the value of their original fund by up to 20 per cent.
Additionally, as the Treasury has already acknowledged that they will not be forcing any pension provider to make the necessary changes to be able to make such payments, the current situation looks set to continue.
In fact, many pension savers may find that their only option is to transfer into another arrangement with an alternative provider and thus incur the high transfer out cost, or, alternatively, purchase an annuity – which does not incur the higher exit penalties as there is no manual override process with the legacy systems already having been set up to purchase an annuity in the first place. Therefore, the ideal solution would seem to be a drawdown-style annuity with cash-out options. Step up the flexible annuity.
Some providers of flexible annuities have now enhanced their offerings with the addition of a fully flexible cash-out feature and can therefore be an ideal way for savers to circumvent the aforementioned problems of accessing their cash from these legacy schemes.
However, one thing to be aware of with this option is that once any income is taken using flexible drawdown, a £10,000 annual contribution allowance will apply. So for those who may wish to continue making any considerable contributions of any kind this option may not be entirely suitable.
This allowance, however, will not be triggered by taking either a secure income or tax-free cash, as it has been designed only to prevent potential abuse in the new flexibility rules – for example, through ‘re-cycling’.
While the new pension freedoms have not been without their teething problems, which realistically was perhaps always to have been expected, they have resulted in an increased number of suitable retirement options being made available for those entering retirement – many of these providing far better value for money, and a fairer return on a lifetime’s worth of savings than the traditional annuity purchase ever has or can.
In the new pensions landscape flexible ‘open’ annuities can provide a viable alternative to a transfer into a drawdown contract without being hit by large transfer-out exit penalties, while providing freedoms to access your cash as and when you need to. Among the new alternatives now available to pensioners as a result of the newly introduced pension freedoms, the flexible ‘open’ annuity most certainly has a major part to play.
Adam Wrench is head of product development at London & Colonial
Key Points
Flexible annuities allow clients to review and change their annuity as their circumstances change.
Many providers are simply not set up to be able to make the requested payments.
Pension freedoms have resulted in an increased number of suitable retirement options being made available for those entering retirement.
