Whither UK Annuities? Why Lifetime Annuities Should Still Be Part of Good Financial Advice in the Post-Pension-Liberalisation World

Abstract

The UK government's 2014 Budget proposed major pension liberalisation for retirees from 2015, which will allow them to draw their pension savings in any form they choose at any time they choose from age 55 onwards. Until now, the majority of retirees have turned their pension pots into income by buying a lifetime annuity. However, annuity rates have fallen steeply over the last 25 years and 'annuity bashing' has becomes something of a national sport in the UK. Thus the proposed liberalisation looks politically astute by playing to popular sentiment, and some commentators have predicted that a huge permanent decline in the sale of lifetime annuities will result. Contrary to the dominant view, this paper argues that many lifetime annuities do in fact offer fair value for money and the protection against longevity risk is probably poorly understood by consumers. The fall in annuity rates has been due primarily to rising longevity, which does not reduce value for money, and post-crisis monetary policies, which although prolonged are not a permanent feature of the economy. While the types and features of annuities on offer may need to adapt, this much maligned financial product should ideally still play a key role in most people's retirement planning and in the free, impartial guidance for every retiree promised as part of the government's pension liberalisation package.

Read IKD Working Paper 71 - Whither UK Annuities?