The immediate consequence of the shock budget was to wipe billions from the value of annuity providers, whose products will no longer be forced upon retirees. The belief that the market for individual annuities is dead sent shares in pure-play providers Partnership Assurance and Just Retirement plummeting - a classic example of the political risk we discussed in last week’s issue.
Now don’t get me wrong – the pensions industry needed an overhaul; too many recent retirees have been caught in the annuity trap and now face a rather thrifty dotage as a result. And those selling annuities haven’t won many friends by seemingly ignoring repeated calls from consumers and government to smarten up their acts – even though, as Mr Bearbull explains on page 18, their current unattractiveness is much the fault of low gilt rates, and consumers are also short changing themselves by not shopping around for better rates.
But while the idea of pension freedom sounds appealing, I did not hear any ideas from Mr Osborne what may replace the guaranteed income stream that annuities are supposed to provide - £10bn of pensioner bonds won’t stretch too far, which means if annuity providers are forced away, retirees will need to work out how to turn their cash into a robust income stream that will last them the rest of their lives.
Creating such streams isn’t the cinch it’s made out to be. We frequently see reader portfolios with the objective of generating income that will not do the job. And we know that there is a tendency to overestimate likely returns and underestimate longevity – which means those planning to live off capital may find their money runs out.
Perhaps that’s why in Australia, whose pension systems is not altogether dissimilar to the one we’re likely to see introduced in April 2015, there is said to be growing calls for the certainty of annuity like products. In the US, where one’s 401k retirement pot can be spent pretty much how you like at retirement, there is still a vibrant annuities market.
What’s more, in both markets a huge industry has sprung up around a more flexible approach to retirement planning. Such structures barely exist here, and the government's promised £20m to provide at retirement advice will certainly not be nearly enough to help people through the complexity they face at retirement – nor will it come soon enough; much pension planning should take place much earlier. I suspect there will be much remedial work to be done once it becomes apparent that Mr Osborne’s retirement revolution lacks this solid foundation.
