Why annuities still play a crucial role in the post-Budget landscape

But I am firmly of the opinion annuities will remain a key option as people look to turn their retirement savings into an income.

The often emotive headlines in the aftermath of the Budget concentrated on the new freedom and choice available, and it is clear there are many attractions.

Industry figures show drawdown sales are up substantially. However, more than £3bn went into annuities in the six months since the Budget – and that is despite significant numbers of people deferring making any decision.

So while the level of sales of individual annuities will be lower in future, there is plenty of life in the old dog yet.

If we consider the differing types of customer approaching retirement, it becomes obvious why an annuity may still be of value to many.

Some of those with smaller pension pots will be attracted to a lump sum rather than receiving a small monthly income.

But even here care needs to be taken, as withdrawals above the 25 per cent tax-free cash level are liable to income tax, and for someone on average full-time earnings of around £30,000, this only leaves £12,000 headroom before higher-rate tax kicks in.

Plus while these people can take a lump sum, some will still want to produce a guaranteed lifetime income.

People with larger pots are perhaps most likely to be willing to take the greater risks associated with drawdown or withdrawing lump sums.

However, many of these may still want to annuitise to some degree as they get older, to take advantage of mortality subsidy, especially if they can acquire better-value enhanced annuities via the open market.

Those with moderate pots of between, say, £30,000 and £200,000 are perhaps in the most difficult position.

These people may like the idea of flexibility, but be uncertain about taking the investment risk required to maintain purchasing power.

They may be against the concept of an annuity, but value a risk-free return and income for life no matter how long they live.

The better death benefits now available to annuity customers – after the government’s long-drawn-out announcements – may also mitigate some of the traditional objections.

Tax-free benefits on death before age 75, longer guarantee periods and higher levels of value protection may all allow greater protection for family where an annuity is purchased.

Freedom to make bad choices 

Risk is key for many of these customers. More choice is fantastic, but most will need expert help in working out how to meet the various risks they face.

Otherwise we could see some withdrawing all money from their pension, paying too much tax along the way, and investing in an inefficient long-term vehicle such as a bank account. Then they are likely to be worse off than buying a decent annuity from the open market. 

This variety of needs and risks is likely to lead to new blended solutions: a combination of some level of underlying lifetime guarantee alongside the flexibility to access remaining funds, and the ability to move more money into the guaranteed element as they get older.

Many commentators have predicted the potential growth of income drawdown, and it is clear this is likely to happen.

But while people want a solution that is flexible and adaptable to their changing needs, few go into retirement wanting to run out of money or suffer a dramatic fall in their income.

So there is a real need to provide lifetime-sustainable income that people can use for some of their savings, while flexibly managing the remainder. Even in the new world, in many cases it will be a question of when to buy an annuity, not whether one should be bought.

Andrew Tully is pensions technical director at MGM Advantage