You would be forgiven, reading the financial pages lately, for thinking that annuities were one of the worst plagues to be inflicted on mankind since the time of Moses. Everyone is applauding the coalition’s announced policy of abolishing compulsory annuitisation at 75 as if it were the fall of the Berlin Wall in terms of the increase of the sum total of human freedoms.
And yes, it is good to give people choice over how they can control their finances in retirement. However, that doesn’t mean that annuities aren’t an important offering in the post-retirement market. They have a lot to offer those of limited means as a way of guaranteeing living standards at an age where it is often too late to return to the workplace to earn more.
Some of the cheerleaders for the abolition are calling for a total abolition of the compulsion rule rather than a moving of the compulsion age from 75 to a later date. And it is still not clear how far the coalition is prepared to go on this issue.
But before we call for a free-for-all in the pensions market, we should take a look at the USA where there is currently no compulsion. The Obama administration’s “middle-class task force” has recently called for an increase in the use of annuities to overcome the issue that too many people were consuming all their retirement savings too early and becoming dependant on the state in their old age.
Insufficient pension provision combined with over-optimistic views of growth has resulted in excessive draw downs from retirement accounts. Annuity take-up is very low, due to perceived high fees and the fact that most people are naturally pessimistic about how long they are gong to live. Also, take-up is discouraged by the financial planners as once the money goes into any annuity, bang goes any chance of earning commissions by trading it.
But the biggest issue that drives people away from buying annuities voluntarily is the shock of seeing a large wad of cash (the purchase price) suddenly turned into a comparatively small monthly amount. Most people take that reduction personally as if they’ve just had it stolen.
And the false perception that it is the company who gets the cash if you die early, rather than seeing it as similar to a pooled insurance risk, is also a turn-off for many retirees.
These attitudes are likely to emerge in the UK too, if annuities are switched to being a voluntary-only policy. It is all very well giving people freedom, but when the consequences of misuse of that freedom have to be paid for by society in general, then I think the government is entitled to regulate. This applies to reckless retirees just as much as to the banks.
This lack of clear thinking around annuities misses the point that annuities guarantee your income all your life and give you the kind of peace of mind that no other product can offer. With the advent of more-targeted annuities delivering better value (enhanced annuities; asset-backed annuities etc.), it is obvious that annuities should play a major part in any sensible retirement portfolio.
So let’s stop knocking annuities. I think the world is suffering enough from the last decades of ‘Spend, Spend, Spend’ and could do with encouraging people to take the type of long-term financial view that annuities support.