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Annuities still a safe bet

Flexible pension rules mean people will be able to take more risk with their cash at retirement. But research suggests annuities will remain popular.

New rules announced in the latest Budget will make it easier for savers to take cash out of their pensions when they retire and spend it on anything from a buy-to-let property to a flash new car.

For many people, the regulation changes mean they will no longer be forced to buy an annuity.

An annuity is a product which takes their pension savings in return for a guaranteed monthly income for the rest of their lives.

Fears money will run out

Many analysts said that George Osborne’s plans, which are designed to give savers more control of their retirement finances, would lead to a sharp drop in the number of annuities sold.

But new research from MGM Advantage calls this view into question.

The retirement income firm says that among over-55s, the biggest financial concern is running out of money at some point in their old age.

The government's changes mean that, when they retire, more people will be able to re-invest their pension in the stock market or assets such as property in order to generate a regular income and benefit from future growth.

Uncomfortable with risk

But MGM Advantage also found that only a quarter of over-55s would feel comfortable managing their own pension savings and taking the risk that their nest eggs could lose value.

Almost a third said they would not be keen to go down this route.

Until last month, people effectively had three choices about what to do with their pension funds at retirement.

Those with a small amount of money saved - £18,000 or less – could take the whole amount as a lump sum.

A quarter was tax-free, with the rest taxed at the marginal rate, usually of 20%.

Limit increased

This limit was raised to £30,000 on 27 March. Withdrawals from pensions larger than this are possible, but currently taxed at a punitive 55%.

Alternatively, the pension could be re-invested in the stock market with a regular income taken from it, a process known as drawdown.

But this option was only available to people who either had significant pension income from other sources, or who had a larger-than-average fund.

The final possibility – and one chosen by the majority of savers – was to buy an annuity.

What is changing?

From April 2015, the 55% tax rate is being abolished: this means more people will be able to take cash out of their pension if they want.

And the rules on drawdown will be loosened so a greater number of savers can choose this option if they wish.

But the fact remains that an annuity will be the only way to guarantee your pension does not run out of money after you retire.

MGM Advantage spokesman Aston Goodey says: "With all the hubbub around the Budget, it is easy to forget people’s appetite for loss and attitude to risk.

Stock-market risk

"From this research we can see although many people are comfortable managing their own money to provide a suitable income throughout retirement, almost one in three are not."

Using drawdown means your money is still in assets that could in theory lose a lot or all of their value in the event of a stock market crash, say.

The same risk is attached to using pension funds to invest in buy-to-let property.

One potential issue with annuities is that their income can be eroded in value by inflation.

But this can be addressed by opting for an index-lined annuity which, although less generous at the outset, will pay out more every year.

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Chris Torney

Chris Torney

Chris is the former personal finance editor at the Daily Express. He's been a journalist for more than 10 years and contributes to a wide range of finance and business titles.Read more from Chris

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