Ennui about Annuities?
Any significant announcements made in a Budget always lend themselves to spur-of-the-moment judgements and by the time the dust has settled and the techies have actually read the supporting documentation from the relevant Government department we find a more measured view.
This budget will not mark the end of the annuity. What it does mark is the end of that feeling of being forced to do something with a sum of money that represents the largest chunk of liquid assets that most Britons have ever accumulated.
The press has been full of chat for years about how annuities are rubbish, and how unfair it is if you die early. Good headlines, appealing to the general sense of unfairness and mistrust which pervades the public's view of financial services. But they miss the most fundamental point that an annuity is one of the oldest risk transfer mechanisms in financial services.
ANY risk transfer mechanism is unfair to those who turn out to have never needed it. This is as true for annuities as it is for income protection, critical illness cover, mortgage protection, buildings, contents, car or holiday insurance.
We advise our clients to effect these plans and have them ourselves. We may never need them, but the whole point is that we don't know that, and we share both the ignorance and the risk with thousands of others, a pooling of risk which is what makes the costs of such risk transfer affordable.
Everything that all financial advisers and planners do is about risk: risk of death or illness, risk of investments not performing, risk of not meeting your financial planning objectives. We are in the business of ensuring that, as far as we possibly can, our clients understand and manage the various risks they face and don't run out of money on the way.
We despise advisers who seek short cuts to the simple truths that there is no such thing as a free lunch, that there is no reward without risk, that it won't happen to me.
Unless and until a company comes up with an investment that does exactly what an annuity does: guarantees (and I mean guarantees, absolutely 100 per cent without question, regardless of the economic or political world around us) a known income stream for that increasingly long period of a person's post-employment life, however long that may be, at a rate that compares with the guaranteed return of an annuity, enhanced when appropriate, tax free when used to pay for long term care, 90 per cent protected by FSCS, then I'm afraid that reports of the death of the annuity have been greatly exaggerated.
Gill cardy, 28/03/2014
|It's all across the news, so prepare yourself for the onslaught!