In April 2015 the UK introduced an option to access retirement monies similar to the Australian Account Based Pension. The Flexible Access Drawdown allows those over the age of 55 to withdraw 25% of their pension post as a tax-free lump sum and the remainder subject to the normal rates of income tax.
Annuity sales had been unpopular because of low interest rates. Sales of annuities have dropped to a total of 33,561 according to figures from the
regulator – the Financial Conduct Authority. Commentators such as Tom McPhail of investment firm Hargreaves Lansdown commented that “if this trend continues much further, we may not have an annuity market at all and that wouldn’t be good for investors.” In the Australian context, it would
not be good for retirees either for the reasons set out below. Annuities are handy when one needs to tidy up legacy pensions. If one has a 1.06(2) lifetime pension where the asset test exemption is important still for Age Pension reasons, a complying Life Office lifetime annuity is a useful solution. This is a very small number of people.
A second reason is that advanced ages the “mortality dividend” is even more important than the rate of return. So, at advanced ages this is a solution for longevity risk. Most projections with an annuity show layers of retirement income – Age Pension; then lifetime annuity; ABPs; other sources etc. With the way the means test works with the Age Pension in Australia, one couldn’t have just an annuity and the Age Pension. Initial income would be depressed. It would be better to have projection software that shows the advance of delaying annuity for life purchases and the need for some ABP. With insurance, one doesn’t want to delay purchase in case health deteriorates. With annuities, the opposite is true – delaying is desirable.
The third use is not lifetime but term annuities. They are handy for sequence risk control. However, that needs a lot more sophistication that is currently evident in the financial planning industry. We need to answer the question about what is the trade-off cost for the extra security. NetActuary will dust off its modelling software for this area shortly.