To buy or not to buy? That is the question!
It has been interesting to witness the changing perception of annuities and income drawdown.
Following the development of SIPPs back in the early 1990s it was not surprising that the inflexible cliff-edge of annuity purchase came under scrutiny - you could manage your own investment in accumulating a pension but you could not after 'retirement'.
Prior to 1995 annuity purchase was the predominant way of turning a pension fund into a stream of retirement income. By 1995 annuity rates were already starting to fall, but even then a 65-year-old male with £100,000 could buy an income of nearly £11,500 p.a. whereas today it would be nearer to £6,000 p.a. (for this argument I have avoided all indexation and add-on benefits).
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At first, income drawdown was really just seen as a way of deferring annuity purchase until annuity rates improved. Remember, at this point people had real experience of higher rates and hoped they could return.
Roll on to today, and the likelihood of double-digit annuity rates has probably gone forever, while income drawdown has become an established retirement option in its own right.
So, back to today's argument of whether annuities are poor value. Well, from an actuarial perspective that could well be the case. An examination of the costs of manufacturing, the profit margin and comparison of the situation over the years would let us know if the 'value' has changed. However, people also buy annuities because they guarantee an income for life. This is a feature that is not easy to quantify, or therefore value, and it could be very different for different parties.
Income drawdown is likely to be the beneficiary of concerns about annuities, but its current form is not without faults. A review for change could make it more fit for purpose in the following areas:

• Simplify current capped drawdown pension rules
Move to a simple percentage-based regime where an annual income allowance is based on the saver's age, thus providing savers with increased certainty of their likely maximum income based on their pension fund value. There is no need for a link to gilts/annuity rates.

• 35% tax on all lump sums on death
Apply a single rate of tax of 35% to death benefits on both uncrystallised and crystallised lump sums. This will remove the current 55% cliff-edge for those using drawdown.

• Allow early access to pension commencement lump sums
Allow a saver's tax-free lump sum to be drawn early by people aged 45 and over. This will help to protect families who might otherwise be lured by pension liberation fraudsters in times of financial difficulty.

• Extend rules on serious ill health lump sums
Allow lump sums to be paid to savers who have already crystallised their pension fund. This will help people with less than 12 months left to live by making funds available to support their needs in their final days.

Retirement has changed but annuities have arguably not kept up. Let's not make the same mistake with income drawdown.

Mike Morrison
Head of Platform Technical
AJ Bell