RETIREES tempted by the wave of “stopgap” annuities launched since radical pension changes were unveiled in the Budget have been told to hold fire.
Partnership last week became the latest firm to launch a short-term annuity aimed at people at retirement who want to take advantage of new rules that come into force next year allowing them to take all their cash out of their pension.
The firm followed in the footsteps of Just Retirement and LV=, which last month responded to the Budget by introducing 12-month annuities designed for retirees who want to keep their options open until the changes take effect.
The Partnership version is an enhanced annuity with the option to surrender after the first year.
The firm, which saw its shares plunge following the Budget announcement, said the product was aimed at 65-year-olds with health or lifestyle conditions that qualify them for a higher annuity income.
Available to those with pension pots of £10,000 or more, it offers access to the 25 per cent tax-free cash and a guaranteed income for life, with the option to back out when the new pension regime begins.
That will be next April when, under proposals set out in the Budget, people in defined contribution pension schemes will be able to take their whole pot as a lump sum. Of that, 25 per cent can be taken as a tax-free sum (as now) and the remainder will be charged tax at their marginal rate, rather than the current 55 per cent penalty.
The new one-year products are seen as a stopgap for people who want to take their tax-free cash without committing to an annuity before next April.
But while such flexibility will be attractive to some retirees, experts believe there are drawbacks. Former government adviser Ros Altmann hit out at the “awful” value of the new deals and called for regulatory intervention.
She pointed to the low interest paid on the 75 per cent kept aside for one year, arguing that retirees are better off leaving it in a cash fund in their pension.
Sarah Tory, a financial adviser at Shepherd and Wedderburn Financial in Edinburgh, is similarly sceptical.
“I am all in favour of providers rallying to fill a hole in the market where there is no product to meet a client’s needs,” she said. “But when this rally is to get a product to market because there is a fall in sales, then that is a completely different matter.”
The one-year annuity has the advantage of helping people to keep their options open at retirement while the pension rules are consulted on, said Tory.
“The attraction of having what seems to be the best of both worlds may seem too good for many,” she said. “No-one wants to be wise after the event; it is critical advice is taken to ensure the best solution is reached.”
Retirees should consider other options, she added.
Some could release tax-free cash or cash from other sources to fund the gap, for example, while there may be no need to take pension benefits right now. Rules that took effect in March increasing the size of the small pensions that can be taken as cash may open up another avenue.
Gregor Munro, financial planner at Johnston Carmichael Wealth, also urged caution.
“I would suggest taking advice, not specifically on the quickest way to access the pension but to check that there are not any good reasons why they should not do this,” he said. “Otherwise you may miss out on valuable benefits such as enhanced tax-free cash, guaranteed annuity rates and/or growth rates, should you be in a rush to access the entire fund.”
The proposed easing of restrictions on pension pot access is currently being consulted on, raising the slim prospect that the new rules may yet be delayed or abandoned.
“Sometimes there is a skill in doing nothing and watching from the sidelines. In this case, where possible, waiting until the rules are set in stone would be a prudent approach,” said Munro.