Whilst whiling away the hours waiting for the new income drawdown rules (expected at the end of Autumn for those of you as interested as me in these things) I came across an article suggesting "another nail in the coffin for annuities?" Delving deeper, I found reference to an EU court ruling on equality which, amongst other things, potentially applies to annuity rates.
Now I know the subject of unisex annuity rates has been around for many years, but it sounds like this time it might be the real thing. I thought I'd check out what effect it would have on current rates and the results were surprising. A £100,000 fund at age 60 would produce a plain vanilla single life annuity of around £5,600 p.a. for a male or £5,400 p.a. for a female, so maybe the move towards equality is factored into the market already?
More importantly in the context of new drawdown rules, are annuities still a valid alternative? Virtually all SIPP and SSAS clients go into income drawdown rather than buying an annuity, because they want to keep control of their funds and they think that annuities are poor value. The control aspect is understandable, but the value aspect needs a bit more thought.
Looking at the above annuity rates in more detail, my actuary colleagues tell me that they are equivalent to an investment with an underlying yield of around 3% p.a. A client is more likely to tell me that it will be 18 years before they see their capital back, let alone get a return on their investment, and they could be pushing up the daisies well before then. Either way, clients and advisors are likely to feel that they can construct an investment portfolio which will make income drawdown a potentially better option, mortality drag notwithstanding.
Income drawdown has some big potential risks and some who have gone into it have found out that they would have been better off buying an annuity. Clients need to go into income drawdown with their eyes wide open, and the general feeling is that they do, and our own Benefits notes, and illustrations and critical yield calculations provide a lot of useful information.
There's a lot of prejudice about annuities and they should still be viable options to consider, particularly for smaller funds or at older ages where mortality drag really kicks in. They are not dead and buried yet but, rightly or wrongly, I think that SIPP and SSAS clients are certain to carry on wanting income drawdown.
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