Poorer people will lose out after the annuity exodus



In the excitement of new rules which will mean retirees can access their pension pots, we have overlooked the needs of those for whom annuities will still be the right choice.

And they could be hit hard by the changes.

The annuity providers have been given a bit of a wake-up call – firstly by a damning regulator review, which highlighted their poor value, and secondly by the changes which means they will have to compete harder for business.

It's no bad thing that the annuity industry has had the wind put up it, the (former) default retirement option relied heavily on ignorance and apathy on the part of pensioners who walked blindly into retirement, buying an annuity, without any thought or knowledge of other options.

With the rule changes came the announcement of a legal requirement for pension providers to provide guidance to all pensioners in the form of the 'guidance guarantee' which will help to highlight drawdown and the risks of living too long.

Despite talk of pensioners flocking to drawdown in order to buy rental properties and Lamborghinis, for many who do not want to brave stockmarket fluctuations and want a guaranteed income for life, annuities will still be the answer.

We may see a new breed of annuity that is better value - but there is also concern that as the number of people taking annuities falls, then the pool of annuitants gets smaller, making annuities more expensive for everyone. In short, if there are fewer people to call on for money to pay out income then that income becomes more expensive to provide.

We have seen this happen already, with more people taking out impaired life or enhanced annuities that pay out more income to those wthl illnesses and unhealthy lifestyles. As unhealthy pensioners are taken out of the pool of 'normal' annuities, healthy pensioners have found their incomes have fallen because the pool of pensioners is smaller.

Unfortunately it will be the least financially savvy and those with the smallest pension pots – for whom it is vital to squeeze out every last penny – that will be hit by an increase in the cost of annuities.

Seven retirement nightmares

Seven retirement nightmares