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The end of annuities? Not yet…

The end of annuities? Not yet…

Category: Annuities

Updated: 25/03/2014
First Published: 25/03/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The Budget announcement last week which, in effect, said that annuities would no longer be necessary, has led a lot of people to speculate that the market could come to a grinding halt. However, even though people don't technically have to buy an annuity, it doesn't mean they won't – the death of annuities is far from on the horizon.

Let's start by looking at what the changes actually mean.

From April next year, anyone approaching retirement with a defined contribution pension scheme will be allowed to take all their pension savings in one go, draw them down over time, or buy an annuity. It's the tax changes that ensure this flexibility – they'll still be able to take up to a quarter of their pot as a tax-free lump sum, while the remainder can be withdrawn, should they wish, at a nominal rate of tax (20% for most people) rather than the current 55%, which put many people off and instead meant they'd generally opt for an annuity.

Further changes are due to come into effect in two days' time (27 March). The maximum amount that can be taken each year via income drawdown has increased from 120% to 150% of an equivalent annuity, while the amount of income an individual needs to qualify for flexible drawdown (which has no limits over how much can be drawn) has reduced from £20,000 to £12,000 a year.

The rules regarding smaller pension pots have altered too, so that up to three standalone pots, individually worth less than £10,000, can now be taken as a lump sum (taxed at the marginal rate of income tax). Anyone with total pension savings of less than £30,000 can now also withdraw them as a lump sum, whereas previously the maximum was £18,000.

In essence, it's a complete overhaul of the pensions system that will give retirees more freedom over how, and when, they choose to access their nest eggs, and means an annuity will no longer be the sole option for most people.

But, that doesn't mean they'll shy away from annuities altogether. There's the risk that taking all their pension savings in one go, or opting for income drawdown, could mean retirees spend their pot far too quickly and are left without a secure income stream, and that could see them needing to rely on the state. Many retirees will therefore still choose to buy an annuity, for the simple reason that it gives a guaranteed income throughout their retirement– a claim that other products don't quite live up to.

"The changes to pensions announced in the Budget go far beyond what anyone would have anticipated and will bring about much needed additional flexibility as to how individuals take their retirement benefits," said Richard Eagling, head of pensions at Moneyfacts. "However, annuities should not be discounted by retirees as they remain the only product that can offer a secure income for life - still an essential requirement for many individuals."

An annuity could therefore still be the best fit for many pensioners, offering the kind of security that they'll want in their golden years, so although extra flexibility is welcome it certainly doesn't mean annuities will fall out of favour. Check out our annuity service to discuss the annuity rates options and see how you can make the most of your pension pot.

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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.