According to Legal & General, new EU legislation could mean that pension savers may become deterred from buying an annuity and instead may opt for other alternatives such as income drawdown / withdrawal. Kerrigan Procter who works for Legal & General Investment Management has said that a more flexible workplace savings model would be likely to become more popular, given that the new EU Solvency II regulations are due to increase the cost of purchasing an annuity. He added that ‘…from October 2012 insurers will be treated more punitively for investing in credit which will make annuities more expensive. People will use annuities less and income drawdown more.’
Another pension expert, Mr David Hutchins from AllianceBernstein appeared to concur with this. He predicted that drawdown products would make up half of the retirement market in just five years. He thought that income drawdown products were much better suited to younger retirees who had to face 20 years or more in retirement. But, he did add a note of caution that drawdown does often incur the additional cost of complex financial advice which can put many savers off choosing this at retirement. If drawdown were to become less costly and simpler, it could become much more attractive to savers, he argues.
The other alleged benefit of more people opting for drawdown as opposed to an annuity is that there would be more investment in the equity markets as more savers plunged their money into these type of investments, rather than relying on the performance of bonds. With rates for annuities being historically low and retirement periods getting longer, it is easy to see why people would foresee more flexible products becoming more popular, especially if the rewards for the risk are much higher compared with an annuity. However, annuities are the best way to secure a stable and predictable income in retirement and so will always have their place in the retirement market.
