Tories vow to axe compulsory annuities

The Conservatives have pledged to scrap laws which force savers to purchase an annuity by age 75, if the party gets into power.

In a Tory document, A New Economic Model, published yesterday, shadow chancellor George Osborne said that he would axe the much maligned rule of compulsory annuitisation at age 75.

Under current laws, savers have to use their pension savings to purchase an annuity by age 75, which will provide them with an income for their remainder of their life.

But annuity values have plummeted in recent times to an all-time low – offering savers very poor value. Retirees buying an annuity today are getting pension incomes of almost half the level of their counterparts back in 1994.

Commenting on the proposal,  a pensions expert at a well known adviser group, says: ‘The Conservative proposal to scrap the age 75 compulsory annuitisation is a good one. There is no decent justification for forcing investors to buy an annuity.

‘There are currently around 450,000 people aged 74 and the best part of 2.5m between the ages of 70 and 74. A fair proportion of them will not want to buy an annuity. Ever.’

What does an annuity get me?

Research from the financial information firm Moneyfacts looked at what annuity a £10,000 pension pot can buy.

In 1994, a 65-year-old man could have received an average annual payout of £1,145. Today, he would get just £625, a drop of 45%. This would leave someone with a £100,000 pension pot getting £6,250 per year, rather than £11,450.

Each year, around 450,000 people buy annuities with pension pots averaging £25-£30,000.

The average buyer is 63, but the age is likely to rise as workers realise the income would be too low to let them retire. The state retirement age is 65. Notably, the Association of British Insurers, the mouth-piece for the pensions industry, recently called for the age at which people have to buy them to be pushed up to 80.

Research shows that the vast majority of pension funds, at 88%, are worth less than £50,000 at retirement. For investors with small funds, an annuity will continue to present the most efficient way to eliminate investment and longevity risk.

The pension expert said: ‘Changing the rules would benefit those who have a more substantial fund or a secure source of income elsewhere, for example from a final salary scheme. It would also send an important message to prospective savers; that they will be able to retain control of the money that they have saved up. This in turn will encourage more people to engage with the pension system in the first place.’He added that he would like to see one further option, which is for investors to be able to bequest undrawn pension funds on death to their children’s pension funds, thereby keeping the money in the pension system, ‘encouraging thrift and helping to avert the next generation’s own pension crisis’.How do I get the best annuity?The key for savers right now is to ensure that they shop around in order to find the best annuity deal available to them, as opposed to just settling for what their pension company offers. Typically about a third of people fail to look elsewhere, although it is frequently possible to find a better deal.

Source of Article:

Jigsaw Corprate Financial Management can help clients find the best deal on an annuity.

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