The Annuity Stopgap Goldrush

01 July 2014

It’s no surprise that tremors are still being felt in the annuity market since March’s Budget announcement. In anticipation of a sharp decline in annuity sales, providers have rushed to develop a new generation of annuity products as a ‘stopgap’ for those retiring before the Budget changes are implemented in April 2015.

One of these providers, Partnership, recently unveiled its new ‘enhanced choice’ annuity designed to allow those with a pension fund of £10,000 or more to lock in a guaranteed lifetime income, which will pay a higher income for those in poorer health or who smoke. The product is aimed at 65 year olds with health or lifestyle conditions that qualify them for a higher annuity income. It offers not only immediate access to the 25% tax-free cash but also the option to surrender after the first year, or continue with the guaranteed income for life. In financial terms, this effectively gives retirees an ‘option’ to change their mind, should the new regulations work in their favour when they are enforced in April 2015.

Other providers, such as LV= and Just Retirement, have also launched one-year annuity products, with the same objective of helping savers access their tax-free cash now whilst allowing them to take the balance of the cash out charged at their marginal rate tax after April next year.

While these one-year annuities are useful in terms of the flexibility they give to savers who cannot delay their retirement choices and require guaranteed income now and potentially in the future, this can come at a cost. The setup of these products are charged at circa 2% of the funds at the time of the arrangement and if the person decides to cash in and move the funds elsewhere 12 months later they may be charged again by the new provider.

Given the level of charges, these products may not suit all savers so it’s also worth looking at existing flexible retirement products already available, such as unsecured pension contracts, also known as income drawdown or income withdrawal. This allows the saver to take an income directly from a pension fund rather than using it to buy a regular retirement income product such as an annuity. The pension fund stays invested, so its value can go up and down, and savers would still have access to their 25% tax-free cash. 

I would always encourage taking impartial financial advice, not just on the quickest way to access the pension tax-free cash but to decide if this can’t be put off entirely, by utilising other savings in the interim. Otherwise, savers may miss out on valuable benefits, such as enhanced tax-free cash, guaranteed annuity rates and/or growth rates. In other words why rush unless you really have to?

Richard Williams
Director 0113 203 5867