You are here: cherry > Press releases for June 2010 > Budget plans to abolish “Age 75 Rule” could cause people to lose out on pension income, says Annuity Direct

24 June 2010

Specialist retirement adviser Annuity Direct launches campaign to draw attention to unsecured pensions’ concerns following Budget plans to scrap “Age 75 Rule” Insurers understating the investment risk required from unsecured pensions to match annuity rates Investments may not produce sufficient income in retirement Annuity Direct calls on FSA to improve guidance on yield calculations THE GOVERNMENT’S Budget promise to remove the age 75 annuity rule could lead to pensioners being worse off in retirement, according to pension specialists Annuity Direct. The new proposals would give people the option to defer buying an annuity at age 75 and instead take out an unsecured pension, which allows an income to be taken from a pension while the fund itself remains invested. Annuity Direct CEO Bob Bullivant said that under government proposals many people could actually be worse off under the new regime unless the risk they are taking is accurately quantified – something that is, on the whole, not happening at the moment. “People who choose an unsecured pension are essentially extending the risk phase of their investment well into their retirement. The positive side of this is greater flexibility, but people need to be aware of the dangers involved,” commented Bullivant. Annuity Direct has recently launched a Fair Unsecured Pensions (FUSP) campaign, which calls on all professional advisers and other interested parties to pressurise the FSA and product providers to create a fair analysis of critical yields. (Note: The critical yield is the annual return required on the drawdown fund to enable the client to draw the annual income they could have obtained from an annuity at outset –the higher the annuity rate the higher the critical yield and therefore risk of drawdown). “By launching this campaign we want to put maximum pressure on the FSA to force insurers to fully explain to clients how critical yield is generated. Right now we do not think insurers are coming entirely clean,” he said. Without proper rules it is not in an insurer’s interest to use a high annuity rate as it makes unsecured pensions look risky. At the core of the FUSP campaign is a clear and concise manifesto: • Clients entering into an unsecured pension automatically receive a whole of market guaranteed annuity quote which if appropriate takes account of any medical condition. If a Guaranteed Annuity Rate applies, then it is always used if better than the whole of market best rate. • The best rate obtained, or guaranteed rate, is used to calculate the critical yield on a type A basis • The critical yield generated is always to be quoted to clients – and is to be recalculated at each review, based on a current whole of market annuity rate which takes account of any changed medical circumstances and any guaranteed annuity rates available. “Of course we welcome any policy changes which allow people more choice and flexibility about how to fund their retirement,” said Bullivant. “Annuity rates are historically low at the moment, and it’s understandable that people may want to leave their pension funds invested and draw down an income instead. “However, the unpredictability of unsecured pension income could mean that pensioners do not have enough money to fund the lifestyle they are planning for the whole of their retirement. “In our view, insurers are in many cases understating the investment risk required from unsecured pensions to match annuity rates available, and that is a worry. “The critical yield calculated on most quotes can be very misleading as insurers calculate the critical yield using their own annuity rates rather than the best rates on the open market or bespoke underwritten rates if the client has a medical or lifestyle issue,” continued Bullivant. “The result is that insurers are understating the yield required, and therefore the investment risk required, to match annuity rates. People could lose out as the returns may not match what they could have bought with an annuity. Unless action is taken quickly before the removal of the age 75 rule people could be badly advised.” For now customers tempted not to buy an annuity should find a specialist adviser who does not rely on standard quotations and who finds the best annuity rate before obtaining a critical yield analysis, added Bullivant. “We fully support the government’s plans to give people more choice about funding their retirement, as long as proper help and information is available. Speak to a specialist provider to make sure you’re taking the route that’s best for you.” – Ends –

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