Articles - The value of annuities in times of crisis

The death of annuities as the primary deliverer of pension income was announced by George Osborne when, as Chancellor of the Exchequer, he introduced his “pensions freedoms” budget in 2014. By no longer mandating annuities as the primary form of income-generating product for pensioners, he opened the floodgates for people to move to other products that were directly invested in the market and therefore seemed far more attractive than annuities, whose rates were weighed down by a global low-interest environment.

 By Tom Murray, Head of Product Strategy for LifePlus Solutions at Majesco.

 However, the perils of allowing the elderly to manage their investment income themselves in drawdown products as they moved into their eighties were always a danger, albeit few could have prophesied the collapse of the markets to the extent that has been seen in recent weeks. Whilst long term investors can ride out the storm, pensioners who need to draw on their investments to fund their everyday life have no such luxury and perforce many are having to draw down on their capital as well as the returns. This will mean that many pensioners will not be in a position to benefit when the markets eventually rebound, a problem compounded by the fact that they are no longer of an age where earning new capital is a feasible proposition.

 Central Banks across the world are making major moves to prop up the markets and prevent total collapse. It does beg the question as to why these kinds of moves couldn’t have been made earlier to provide better investment opportunities for pension funds to guarantee higher annuity rates, thereby making annuities a more attractive proposition for retirees at retirement. Better returns on annuities would encourage people to start re-investing their pension lump sums into this product, thereby ensuring a more stable income flow throughout their retirement years.

 This would have meant that those of pensionable age, already living in fear due to being part of the most-at-risk group of the population when it comes to the coronavirus, would not be simultaneously facing a collapse in their investments and an increased risk of impoverishment in their old age. IFAs would feel happier recommending annuities and would not be risking the wrath of those who were happy with their drawdown products when investment returns were rising but who are now looking for someone to blame as the value of their drawdown products are collapsing fast.

 The government in the UK is pledging to embark on a huge investment spree to upgrade the country’s infrastructure and to help restore the economy after the financial hit of the epidemic. Maybe it’s time to look at how this huge investment could be opened to the pension funds and structured to give government-guaranteed returns across the lengthy lifetime of these projects. Such a guaranteed income stream could enable the government to achieve far more with the funds they have, whilst allowing the pension companies to offer decent guaranteed returns to pensioners with confidence.

 Finding ways of improving annuities to make them the first choice of retirees should be a priority for the government. The current crisis is very dangerous for this particular section of the population and the last thing the Government needs is to have to grapple with a large group of suddenly impoverished pensioners whilst trying to rebuild the economy once this crisis is over.

 Pooling risk remains the best way to provide long-term protection for pensioners, a group that has a defined amount of cash available to support themselves across a period of time that is unknown at the individual level but can be actuarially calculated for the group as a whole. The sudden and wholesale collapse of the market shows clearly the danger of leaving those dependent upon their investment income individually exposed to the vagaries of the marketplace. Directing some of the Government efforts into supporting the returns available for annuities would be a more efficient way to maximise the ability of pensioners to support themselves. It would be a far better and more controlled spend of taxpayer’s money than the harder to quantify approach of leaving investment to the individuals concerned and then having to provide support to those who end up in trouble.

 There will be many lessons to be learned from this epidemic and changes will be required on how our society is structured. Across the globe, large investments will be required to get economies going again. The government should look to do this as efficiently as possible; devising schemes which both increase investment in the economy whilst delivering decent levels of income to the elderly should be high on the agenda as it seeks to future-proof the economy against further shocks of this nature.



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