There are a great many number of considerations that need to be made once you have decided to retire. The first of these, of course, is something that you most likely start to think about long before you know for sure when you will retire and that is because it impacts exactly when you can stop working. This biggest consideration of all is your overall financial picture and if you can afford to retire at the age you’d like. For many, living longer means that more money is needed to sustain a consistent way and standard of living once the working years are over. For most workers, it has always been assumed that once retirement was decided upon, the next step would automatically be to invest in an annuity using the pension income that was saved up over the course of the years spent working. For many consumers, this was just an automatic decision. Based on what was saved up in a pension, workers would decide exactly when they could afford to retire. However, very recently, the way we retire and fund our retirement has changed quite drastically.
The new budget changes, released just 19th March have changed the entire way our retirement system works, including how we fund our years of retirement. The Chancellor announced that starting next year, it will no longer be a mandate that consumers must take out an annuity upon their retirement. This means that consumers can choose to take their entire pension pot, instead of a proportion, as a onetime payment, which would be subject to taxation. Of course, this radical decision stands to leave in its wake quite a few ramifications. First, annuities were locked in once purchased which means that consumers weren’t able to back out of their deal once they had signed on the dotted line. However, for those consumers who signed up within the 30 days following the announcements, there may be some entitlements in place to allow them to void their contracts. In fact, many consumers immediately called their insurers upon the announcement, hoping to rip up their contracts. Many insurers have even offered extensions to those consumers who have recently purchased their annuities, up to 60 days following the recent announcement by the Chancellor.
With so many consumers pulling out of their deals, there could be major consequences for the annuity companies, as well as other financial industries. It is estimated that somewhere around 30,000 consumers have purchased their annuities in the last 30 days while an additional 200,000 who are up for retirement soon may have already started the process. Not only are these consumers thinking about pulling out of their annuities, but so are the estimated 400,000 consumers who are scheduled to retire before the rules of the new announcement take effect. It is estimated that instead of the annual 400,000 consumers signing up for annuities each year, annuity companies could see a drastic cut to nearly 80,000 new consumers who choose to take out an annuity each year. However, it is also troubling for many consumers that there seems to be an arbitrary cut-off point by which they can back out of their deal. With no sign of this change coming, many consumers feel positively blindsided by this announcement and many may have recently purchased an annuity but cannot back out of their deal now. There will undoubtedly be those consumers who are contracted into a poor deal simply because they missed the cut-off point by mere days or weeks. This also stands to leave consumers very confused about what their best options may be, especially given that they are under a new time crunch. Many consumers may still find that an annuity is their best option, but with very low returns as of late, that certainly won’t be the case for all of those who are now locked in to a poor annuity.
There are ramifications that extend far past the basic annuity market. In fact, there has even been some talk that the reform to the pensions could end up forcing the elderly to pay more for their social care. Of course, Ministers have denied that this is a possibility. However, it is a distinct possibility given the means tests performed in order to receive assistance in paying for long term care. The present rules that govern the assessment do not take into account any money tied up in annuities or pensions. However, it does factor in cash that is available on hand. So, if lump sum withdrawals from annuities continue to be counted, elders could see themselves paying a great deal more out of pocket for their social care expenses.
Next, it is possible that the equity release market could also take a hit from these recent changes. Annuity income is typically what sponsors the equity release market. So, without annuity income the equity release market stands to lose a large portion of its income stream. This could mean an overall shortage of funds available for equity release. So, the changes introduced do not just stand to leave consumers and insurers confused and scrambling but there could also be a domino effect felt by other markets in the industry.