Written by Altus on Wednesday 26 March 2014
In the days since George Osborne stood at the dispatch box and announced “Let me be clear: No one will have to buy an annuity” much has been said about the death of the annuity product but to paraphrase Mark Twain I suspect the pronouncement of death may be premature. Annuities have been around in one form or another since the medieval times and I doubt they are going to disappear any time soon.
In about thirty years many of today’s normal working people will be reaching retirement with defined contribution pension pots probably ranging from several hundred thousand pounds to well over a million. The day they retire they will be faced with the decision of what to do with this money. A very small proportion may well blow a large chunk on frivolous purchases such as fast cars in much the same way that many city bankers do every year with their bonuses. The vast majority however will be much smarter than this and look for ways to provide for their remaining years of retirement. In order to do this they are going to have to put together a portfolio which is able to provide an income over the next 30 years. They then need to manage this portfolio skillfully so they can eke out an income until they finally expire. If this is what you want from retirement then good luck to you but frankly it’s not my idea of a restful dotage.
What we need are financial products that can manage the investments to provide us with an income. We need organisations that can administer the products, manage the investments on behalf of many members and minimise the risk. The problem is, what I’ve described there is an annuity provided by an insurance company and as we all know nobody likes annuities and nobody trusts insurance companies. So what’s the answer?
Instead of standing around eulogising the death of the annuity maybe we need to get out the defibrillator and see if we can bring it back to life. As is often the case after a near death experience the patient changes, throws away their old ways and becomes healthier and more responsible. Let’s bring some innovation back to the insurance companies. Resurrect the annuity as a more flexible product. Rather than concentrating on innovative ways to lock people in to inflexible products why not come up with innovative flexible products that people will flock to. The main issue at the moment is that interest rates are low so annuity rates are too. So why not explore variable rate annuities linked to investment performance, there are companies offering them in the UK already. People don’t like the idea of making a decision which will impact them for the rest of their lives particularly when they don’t know what is coming around the corner. So why not explore hybrid annuities where you maintain control of at least some of the assets to cover unexpected expenses.
Maybe what we are seeing is the death of the standard annuity. Now it’s over to the insurance companies to ensure that what rises out of the ashes is a phoenix not a dodo!