Analysts at Leeds-based Pearson Jones believe that many of the 250,000 people who together hold £20bn in pension “income drawdown” plans should consider switching over to buying an annuity. The need to review alternative pension arrangements became more important after April’s relaxation of the rules on income drawdown, which abolished having to buy an annuity at the age of 75.
John Metcalf, Pearson Jones’s wealth management director, said: “It will become too easy for some people to drift into unsuitable investment strategies which may lead them unwittingly into relative poverty. This is because, the older you get, the higher the return you need from an income drawdown arrangement to beat an annuity.”
One of the attractions of income drawdown has been the possibility of passing on the remainder of your fund to your surviving spouse or the next generation when you die. Previously, where this happened before the age of 75, lump sums were taxed at 35 per cent.
However, since April, the tax has been increased to 55 per cent. According to Mr Metcalf, this should force some people to rethink their strategy.
“If at 65 you knew you would die at 88 you could maximise your income so it was all gone by your death but this would leave you with nothing if you reached 88 and were still fit,’’ Mr Metcalf said. “On the other hand, you may think you are going to live to a ripe old age and live frugally, only to die soon after you retire.”
Claire Bell, an associate in the pensions team at law firm DLA Piper, said yesterday: “The problem with not buying an annuity is that there is no certainty on how long the member’s pension savings will continue to meet their income needs. Buying an annuity gives certainty that a pension will be provided for the rest of the member’s life, and if the option is chosen, the member’s spouse or partner.
“A member can also opt to buy an annuity that includes some degree of protection against inflation, so that the pension that they will receive for the rest of their life will broadly be able to provide the same standard of living.
“If an annuity is not purchased then this could lead to too much of the pension savings being used too soon.”
Changes in the economy could mean that the value of the pension savings do not keep up with rises in inflation, Ms Bell said.
She added: “In both cases this may mean that a person will have less spending power as they progress through their retirement. The issue is not a simple one, and the options of buying an annuity, and on what terms, require careful thought.”
Nigel Swan, a pensions specialist at Harrogate-based Ellis Bates Financial Solutions, said: “Purchasing an annuity may take the investment risk away from the client, but (you) cannot predict changes in circumstances. There are products available that can offer fund guarantees while still providing flexibility.”
Jonathan Baker, an investment manager at Charles Stanley in Leeds, added: “I understand John’s views that some people could drift into unsuitable investment strategies. If you have a strong relationship with your investment advisor, who understands what you want in your retirement, then this should be avoided.”