The problem with annuities is that rates are related to the yield on government stocks at the time the annuity is purchased, and that yield fluctuates with interest rates. People who bought annuities around 1990 received annuities of 15 per cent for life. Anyone buying one now is lucky to get 11 per cent.
New rules make it possible to take the proceeds of a portable pension on retirement and reinvest it to provide an income rather than an annuity. The income might be smaller, but the capital remains the property of the pensioner who can keep it until he or she reaches 75 before buying the annuity.
There is, however, a risk that annuity rates will fall still further, especially if inflation has been eliminated from the economy as some economists claim. Anyone who delays could be forced to buy an annuity when rates are even lower. There is a temptation to take more income out of their pot than it earns, eroding the value of the capital and forcing pensioners to take undesirable risks with the capital in an attempt to maintain living standards.
Next week, Commercial Union plans to launch a new flexible personal pension plan which will allow customers to opt for income withdrawal or phased retirement or a combination of both. There is a choice of a self-invested pension option or 13 CU funds in which to invest the retirement funds, all with different levels of risk and return. The annual income can be adjusted each year so that no more is taken out of the pot than is needed, and the income can be channelled into a bank account with 24-hour access if required. Customers are also being offered an overdraft facility to draw on rather than liquidate investments at an inopportune moment, and a helpline for clients and their financial advisers.
Commercial Union will not levy a charge on those who switch their pension pots to Commercial Union on retirement or who opt out after three years, but they may find their original fund managers want to charge them for switching to CU and financial advisers may well want a commission for recommending them.