The Chancellor's retirement income revolution will bring the biggest changes to pensions in a generation. Jenna Towler finds out if annuities have reached the end of the line...
Removing virtually all restrictions on how retirees can access their defined contribution (DC) pension pots was a bold (and surprise) move by Chancellor George Osborne in his fifth Budget speech.
And while many pension luminaries welcomed the measures, others were more cautious, highlighting the risks associated with opening the pensions equivalent of ‘Pandora's box'.
Osborne said 13 million DC savers were effectively railroaded towards buying an annuity but this would end.
eValue strategy director Bruce Moss told Professional Adviser the policy shift came with significant risks and many "knotty issues" to work through.
Moss cautioned the industry would need to rethink its entire approach to communicating risk to clients. "The risks associated with sustaining an income in retirement are entirely different to those that confront an investor looking to accumulate wealth."
Moss also said the Financial Conduct Authority had probably been "caught unawares" by the Chancellor's announcement. "It was probably a shock to the FCA as well. It will have to come up with some guidance very quickly."
Annuity providers and the big insurers were dealt an immediate blow with a massive sell off in their shares on Wednesday afternoon. But taking a longer-term view, they remain convinced annuities will still be attractive to the majority.
MGM Advantage pensions technical director Andrew Tully said backed more flexibility but added: "We need to make sure people understand the impacts on their tax position (if they take it all at once) and their standard of living in retirement.
"Many people need a regular sustainable income, and hopefully advice will help them make the best use of flexibility while meaning they don't run out of money."
Pensions minister Steve Webb added fuel to the fire the day after the Budget when he said it was people's choice whether they used their pension "to buy a Lamborghini". But how likely is it people who have saved all their lives will blow their fund in one go? They are probably actually looking for security.
Association of British Insurers director of policy and deputy director general Huw Evans said: "It is easy to forget that compulsory annuitisation has already been abolished and that didn't destroy the market.
"Annuities will remain an important retirement income product for people who wish to have a guaranteed income for life and who will still have to decide when to annuitise and how much to spend."
He added that the variable annuity market, products which are common in the US, could also get a boost although "they are not loved by UK regulators".
Hargreaves Lansdown head of pensions research Tom McPhail said doubting investors should review their current retirement plans but said annuities would still be the product of choice for many.
However, he added: "We expect insurance companies to be forced to work a bit harder for investors' money. Drawdown offers a useful short-term option to pay out some income if needed at retirement while investors work out what to do next."
Speaking of drawdown...
Advice firm Portal Financial, which specialises in drawdown arrangements, said the minimum income requirement (MIR) reduction (from £20,000 to £12,000 this week) would give thousands of retirees "immediate and enormous" flexibility bringing with it greater temptation.
Partner Andrew Moore explained: "The temptation will be there to use drawdown to invest in buy-to-let or other potentially high risk investments without having the spread of assets that you would expect with a well-managed drawdown portfolio, or the absolute certainty (at a lower income level) associated with annuities.
"Flexible drawdown must be treated with caution, particularly if this is the only source of retirement income."
He warned proper advice was the only way to ensure "stewardship of cashflow in balancing risk with likely return and ongoing income".
The reaction to Osborne's swathing reforms was unprecedented, as of course he wanted it to be. However, as the dust settles on the last coalition Budget before the general election, it is debatable what the changes will do for the millions of middle income workers, with averaged-sized pots. If annuities remain the ‘go-to product' for these people, the industry still has a lot of work to do.
From today: MIR for flexible drawdown cut from £20,000 to £12,000
Max income limit for capped drawdown increased from 120% to 150% GAD
Trivial commutation limit up from £18,000 to £30,000; Small pot commutation from £2,000 up to £10,000 (max three pots)
From April 2015: Savers to get access their entire pension from age 55. A quarter remains tax-free, the rest available at a marginal rate
No transfers will be allowed from public sector DB schemes to DC pension schemes. Private sector DB schemes free to decide
Key points from AJ Bell
Taking the time to look
After 14-month FAS programme
More than half of people over the age of 55 see financial security as a top priority in retirement, yet a third allocate more time to buying a new car, research from Legal & General (L&G) has found.
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Number of benefits