As far as the provider is concerned, what was an asset (funds under management) now turns into a liability with an annuity and only becomes a profit if the annuitant dies within the actuarial assumption.
Cross subsidy here helps them make a profit.
If someone’s only main investment asset is his/her pension, then I contend they were poorly advised.
Funding for a pension should only be to take out your higher rate tax – otherwise the tax relief is only loaned money, unless of course there is a worthwhile employer contribution.
If a basic rate payer gets 20 per cent relief but taxes increase in retirement, that is a pretty poor advantage.
It is perfectly possible to build up a very significant Isa portfolio, from which income is tax free and does not even have to be entered on the tax return.
If there are further funds available, insurance bonds are a very useful addition.
After all, you can take a tax deferred income for 20 years and if you start at 70, who is going to worry about the tax if they survive to 90? Even then, they may have no liability if they are basic-rate payers.
In which case if you have these, you have adequate exposure to the market and an annuity can then form a cornerstone.
To imagine that everyone retires at 65 is somewhat of a warped assumption, particularly in light of age-related legislation.
It makes a huge difference to annuity rates if you retire at, say, 70. I can assure Mr Liversidge that my annuity rate (normal and no impairments) was better than the percentage he quotes.
But even taking that figure; to achieve a 5 per cent drawdown, you need to have around a 7 per cent growth in order to maintain capital value when all the associated charges are taken into account.
Cash flow is paramount. Depleting capital only works well if you know exactly when you are going to die.
With a joint life annuity, the survivor has no complicated task.
With drawdown there is the need yet again for professional advice – at a cost.
Getting your money back is a misleading argument.
If you have other assets then these may be passed on and buying an annuity is, in fact, quite inheritance tax-efficient.
If you do not have an accident, you do not ask for the car insurance money back.
When you are dead you are dead, and provided you have made provision for your spouse, money will no longer be a concern.
It is no coincidence that HM Revenue & Customs is reaping rewards with these ‘freedoms’.
