The most radical reforms to how we access our pension funds will come into effect from 6 April 2015, allowing retirees the most flexible access they have ever had.
Chancellor George Osborne’s declaration in the 2014 budget speech that “no one will have to buy an annuity” has had many speculating that we may see the end of annuities in the future. Yet with an annuity still being the only option to truly guarantee an income for life in retirement, it’s yet to be seen whether pension reforms allowing flexible access will be the most beneficial option for most retirees.
“There will be those to whom absolute financial security in retirement is paramount; for these clients annuities will always have an appeal. Also those in ill health can get distinct benefit from [impaired and enhanced] annuities.” – Mark Ridgement, Director at Cornwall Finance and Investment Services.
The security that annuities offer cannot be rivalled by the alternatives. Income drawdown will require retirees to take full responsibility for their money, as there is no fall back if it is managed incorrectly and the risk involved could see many overestimating just how far their money may stretch, or even underestimating their own life expectancy. Those in ill health will also be able to take advantage of impaired and enhanced annuities – where an annuity provider will actually supply you with a greater rate due to perceived decrease in life expectancy – with no such benefit available with the annuity alternatives.
But with the introduction of the new rules, how is the annuity market looking for 2015? Despite rates declining steadily over a number of years, 2013 saw a record rise – the biggest since 1994. We asked Peter Cole, Managing Director of Henderson Armstrong whether he could predict how rates may change in the coming year:
“Rates may reduce owing to the reduced numbers sold. This is due to usual costs not being diluted. [Or] rates may increase as a result of providers trying to ‘attract’ business… The reforms though are already, and will undoubtedly continue to reduce the appeal of annuities as most people prefer to have the option of accessibility.”
With people looking to take advantage of the greater flexibility of access that the reforms will allow them, what can annuity providers do to ensure that their products are still attractive to the at-retirement market? Mark Ridgement believes that we will likely start to see the providers taking measures to improve rates and increase the desirability of an annuity as an option but predicts “lower participation will mean that standard annuity rates are more likely to fall than rise in the short term”, estimating less than 30% of the overall at-retirement market will use their pension fund to purchase an annuity.
Despite this, security in later life cannot be taken lightly, and while it still seems too early to predict just how the market will look in 12 months’ time annuities will surely remain a viable option for many in retirement. As Peter Cole concludes:
“Annuities will continue as they offer an income guarantee for life. This remains attractive to the risk-averse. Also those in poor health will continue to enjoy ‘improved rates’. “The reforms though are already, and will undoubtedly continue to reduce the appeal of annuities as most people prefer to have the option of accessibility.”
