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From Mr Tim Cotton.
Sir, It is an uncomfortable truth that there must be an element of compulsion for the annuity market to function effectively. Retirees underestimate their lifespan and, given a choice, often defer annuity purchase for as long as they can. Previous policies providing “greater choice” have already created an annuity pool with later mortality than the population as a whole, leading to low rates and a perception of poor value for money.
It is difficult to see how the annuity market will survive George Osborne’s coup de grâce. Increasingly annuities will be the choice only of careful people who expect to live a long time, and as the longevity of the annuity pool increases, rates will fall progressively until they are attractive to no one.
This will be to the great detriment of future retirees. Annuities are the only retirement income product to deliver what most retirees want: a dependable income for the rest of their lives. Annuitants do not need to make decisions about where to invest and how quickly (or how slowly) to spend their retirement nest egg.
With the inevitable loss of the annuity market the requirement to make these decisions will fall upon all of us, including ultimately the very elderly, leaving us less secure financially and vulnerable to poor decision-making or bad financial advice.
Many people welcome the chancellor’s announcement: removing compulsion better fits an age where personal freedom is revered. There will be “choice” provided you don’t want the choice of buying an annuity.
Annuities are an example of pooling together to provide better outcomes for everyone. Like final salary pension schemes, the loss of an effective annuity market will be a loss to society as a whole, though one that will not be fully appreciated for many years to come.
Tim Cotton, Chartered Financial Planner, Bournemouth, Dorset, UK
Letter in response to this letter: