The loss of control with annuities can deter savers from using them in their retirement planning, according to Billy Burrows, adviser for Eadon & Co.
Speaking at a Pension Playpen session yesterday (June 6), Burrows, who is the founder of the Retirement Planning Project, discussed the annuity versus drawdown debate.
He looked at the case for annuities and drawdown, the annuity puzzle and the “misconception” that drawdown is better than an annuity for producing income.
“A lot of people say annuities are a ripoff, legalised theft, but proper analysis shows that annuities are good value and there's nothing wrong with them,” he said.
“Pension freedoms have introduced a lot of behavioural aspects and the loss of control of an annuity is something that puts people off, as people do like the idea of being in control."
He added: “I can present an annuity to people in a way that would turn them off and people think of annuities as being legalised theft, but I can also present an annuity as something that's really attractive.”
Burrows said one of the problems he finds in this market is that a number of advisers have “almost predetermined their advice”.
“If somebody goes to a non-advised annuity broker, they get the correct information but it will be biassed towards an annuity,” he said.
“If you go and see an adviser, there's a temptation for advisers to favour drawdown because of good reasons for the client and meeting their objectives. But also as an adviser, it's more lucrative managing monies in a set on an ongoing basis.”
Another problem Burrows outlined was that a lot of investors were confused because they've been reading about increasing annuity rates but they cannot understand why their pension funds lag behind.
“I think that's a result of Liz Truss’ mini budget,” Burrows said.
“And the so-called cautious funds that have been packed full of bonds really haven't performed very well at all.”
Meanwhile, when it comes to the retirement market, there are different groups of people, Burrows explained.
The first are people with relatively modest pensions.
“There's the other end of the scale, the high net worth - so called fat cats - and then what I call upper middle income which I find most interesting because these are the people that will really benefit from advice.”
He said that previously, this group would have taken an annuity but since pension freedoms, this middle group has been using drawdown which has become the new default for them.
“We need to be mindful that there are different types of clients with different types of objectives who need different solutions,” he said.
“So the case for annuities is quite simple really, and not complicated. Annuities are the only policy that guarantees a high level of income for the rest of someone's life and, importantly, reduces or eliminates risk.”
