As Just Retirement shareholders will tell you, the 19th of March 2014 was a bad day to own shares in an annuity provider.
It was on that day that George Osborne announced an overhaul in the retirement market: “nobody will ever have to buy an annuity again”.
Almost instantly, share prices halved.
Terrible if you are an annuity specialist, better news for anyone retiring from April 2015.
One of the complaints regarding retirement planning I would regularly hear from clients was that pensions were unattractive because you couldn’t get your money back.
In one sentence that disadvantage has now gone.
The fears of retirees spending their pension fund on a sports car is unfounded and somewhat patronising.
If you had the diligence to save during your working life, why would you blow it all on a hedonistic purchase? Although to quote George Best: “I spent a lot of money on booze, birds and fast cars. The rest I just squandered.”
There will no doubt be a huge increase in the volume of calls made to pension companies with people enquiring about the opportunity but I don’t believe there will be the predicted tsunami of pension fund holders liquidating their funds all at once.
I believe this will be the case for four simple reasons:
1) Once they find out they may pay up to 45% in tax (possibly more if Labour win the next Election and increase the top rate of tax back to 50%) the attraction will quickly diminish.
2) They know it will have to support them for decades so why move a fund that is growing tax free to somewhere where tax will be paid on capital gains?
3) Risk averse savers value the security of regular income that an annuity provides. Annuity rates may not be what they were five or ten years ago but the return is better than is available from a savings account and is without the risk of stock market investing.
4) Untouched pension funds are free from inheritance tax so liquidating a fund only for it to form part of a taxable estate would be foolish.
There will, of course, be reasons to liquidate some or all of a pension fund; to pay off mortgage and other debt, to assist children financially, to fund a home improvement – to give three examples, but these decisions will be weighed up against the above points so that an informed decision is reached.
Whatever the effect of George Osborne’s announcement the fact that it will have people thinking more about their retirement is a very positive by product.
Whether George Best would have taken the prudent approach is questionable.
