Chris Curry, research director, Pensions Policy Institute
No. Annuitising is likely to remain the safest and most appropriate option for converting defined contribution pension savings into a retirement income for the vast majority of people.
Our broad estimates suggest that around 600,000 to 700,000 people in the UK between the age 55 and 75 in 2010 are either already using income drawdown or have enough saved in a defined contribution pension fund to have the potential to use the new Capped Drawdown arrangements from April 2011. This represents around 5 per cent of all people aged between 55 and 75 in the UK and around a quarter of those aged 55 to 75 who have defined contribution pension pots and haven’t yet purchased an annuity. We also estimate around 2 per cent of all people aged between 55 and 75 in the UK and 7 per cent of those aged 55 to 75 who have defined contribution pension pots and haven’t yet purchased an annuity could exercise flexible drawdown.
However, in the future, a greater number of people may be able to take advantage of both Capped and Flexible Drawdown, as more individuals build up defined contribution pension funds and the market for annuities and drawdown products develops.
Aston Goodey, sales and mktg director, MGM Advantage
No. There is a huge danger that now people aren’t legally obliged to purchase an annuity at age 75, they will drift along in drawdown without fully understanding the progressive nature of its risk.
Drawdown becomes less suitable over time, as beyond age 75 the ability to deliver consistent investment returns that will compensate for the absence of mortality cross-subsidy, become increasingly unrealistic. This, coupled with rising inflation, highlights how unsuitable drawdown is as a long-term solution for some people.
The scrapping of the age 75 annuitisation rule could inadvertently encourage people to stay in drawdown for longer than is suitable and mean they risk missing out on the benefits of mortality cross-subsidy. Mortality cross-subsidy is the process of pooling the funds of annuity policyholders who have died earlier than expected and sharing these among remaining customers. You don’t get mortality cross-subsidy with income drawdown.
Our research shows that for a 70 year old male living for 20 years with a pension fund worth £100,000, this could mean missing out on over £70,000.
Mike Morrison, head of pensions development, Axa Wealth
Yes. But only because there are a lot of people who do not like the idea of buying an annuity, even though it may not be the most suitable product.
Annuities have had so much bad press over the years, most recently with the unisex annuity case brought by the Belgian consumer group, and with Solvency II, that people simply do not like the concept.
Obviously those with smaller funds will buy annuities, but I think there is a segment of the market who think their funds are too big to buy an annuity, but who do not have a big enough pot to successfully live on their income drawdown plans.
You could argue that people with less than £200,000 ought to buy an annuity, if they have not got any other assets elsewhere. That might only get you around £10,000 a year.
But as DC pots grow bigger, more people will be looking towards drawdown. It is the role of the industry to make sure people are directed towards vehicles that are suitable for them.
