Press Release

IMA CALLS FOR MORE CHOICE FOR RETIREMENT INCOME

11 March 2008

"Need to call time on compulsory annuitisation"

The Investment Management Association (IMA) today released new research demonstrating how non-annuity investment products can provide a lifetime income for retirement.  It is calling on the Government to offer more choice to consumers when they are deciding how to get the most out of their pensions at retirement.  This would enable greater flexibility and potential for higher income at retirement for the increasing number of individuals being encouraged to save in defined contribution (DC) schemes.   

The IMA's research models eight different drawdown strategies that could be used as alternatives to conventional annuities and finds that it is possible to have a withdrawal strategy that delivers higher returns while avoiding the risk of running out of money in retirement.  It finds that the combination of lifetime income and bequest under the alternative strategies delivers up to 20 per cent more than conventional annuities.  But because the strategies carry greater exposure to market risk, a combination of annuities and drawdown may be optimal for many people.

Commenting, Richard Saunders, Chief Executive at the IMA, said:

"Diversification is the key to investment before retirement, and it has an important part to play after retirement too.  The current rules which require people to buy an annuity by the age of 75 act as a barrier to diversification, and prevent choice and product innovation.  We need to call time on compulsory annuitisation. 

Long term retirement provision is moving inexorably towards defined contribution schemes.  The introduction of personal accounts will give a further major boost.  The question of how to ensure that individuals can convert their savings into a decent income when they retire will become urgent."

The Treasury argues that annuities are the best option, because they offer:

1.  Certainty - the money does not run out;
2.  Avoidance of moral hazard - they prevent individuals from using tax-subsidised pension savings in the early years of retirement and having to fall back on welfare in later years; and
3.  Retirement focus - the tax subsidy for pension saving is to enable post-retirement income, not to subsidise bequests.1
IMA believes all three of these arguments are easily rebutted. 

1. Certainty - the IMA research demonstrates how withdrawals can be constrained to provide a lifetime income; in any case most annuities sold are fixed in cash terms and therefore severely exposed to inflation risk;
2. Avoidance of moral hazard - this can be addressed by rules limiting income draw down, as with the existing pre-75 drawdown rules; and
3. Retirement focus - the capitalised value of tax relief could be recovered by a special tax on any bequest; this is not an argument against allowing contributions by or on behalf of the individual to pass to the estate.
Continuing, Richard Saunders said:

"The arguments in favour of compulsory annuitisation do not stand up and the time is now right for a new debate about the decumulation phase, giving consumers access to greater choice."

To view IMA's research paper, Modelling Income Drawdown Strategies, click here.

To view IMA's discussion paper, Enabling Choice for Retirement, click here.