Tories call for annuity rules to be scrapped
The Conservative Party has called for emergency pension protection to shield retirees from the global stockmarket turmoil.
Chris Grayling, shadow secretary of state for work and pensions, says current rules that force people to buy an annuity either on retirement or before their 75th birthday should be scrapped. He argues that forcing people to lock themselves into a long-term pension income could leave current retirees “significantly worse off” as a result of the current financial climate.
Grayling says: “It makes no sense to penalise someone whose birthday happens to fall within the current period of extreme turbulence.”
The call has largely been welcomed by pension experts, who agree that scrapping the age limit would encourage people to think about how best to invest their retirement pot.
David Marlow, director of Alexander Forbes Annuity Bureau, points out that retirees are not forced to take out an annuity and alternatives are available.
“For pension savers who have accumulated funds of around £100,000 and above, when all ‘pots’ are combined, there are several different options to consider,” Marlow explains. “They may be better off taking a phased annuity or possibly looking at some investment linked options so that their fund can continue to grow post retirement.”
Andrew Strange, policy director at the Association of Independent Financial Advisers, agrees with the Conservative Party that the current market conditions could result in some people being significantly worse off in retirement than they would be otherwise.
“This is evidence of the failings of compulsory annuitisation rules within the current pension system, and therefore going forward we would like to see them reviewed," he says.
Marlow adds: “Whether the annuitisation age is 65, 75 or 85, the real issue here is to make sure that those approaching retirement consider all of the options available to them and get the best possible income for their fund.”
Nigel Callaghan, pensions analyst at Hargreaves Lansdown, says those retirees that have yet to purchase an annuity are likely to have a well-structured investment strategy in place.
“Many of these investors will have been de-risking their pension portfolio in the years leading up to their 75th birthday by progressively moving out of equities and into more secure assets such as cash and fixed interest,” he explains.
And Callaghan adds that investors still have the option to defer buying an annuity after age 75 by moving into an alternatively secured pension: “This is similar to income drawdown, but with greater restrictions. This contract could be used as a temporary measure allowing the once-off decision to purchase an annuity to be further deferred until a more favourable time.”
The problems of increased life expectancy is likely to fuel the compulsory annuitisation debate in the years ahead, as the baby boomer generation starts to hit their sixties.
Callaghan predicts that the number of investors who will reach the age of 75 without having bought an annuity will rise expediently.
He adds: “These investors urgently need the forced annuitisation age to be scrapped to allow them to plan appropriately for their retirement that will typically last into their later 80’s. The rapid rise of individually priced annuities based on an investor’s health and lifestyle means an ever widening gap in annuity available for older investors.”
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.