Caution urged over IMA proposals on retirement income

Just Retirement, a leading provider of solutions for people in retirement, urges caution over the Investment Management Association (IMA) proposals to relax requirements over income in retirement.

The IMA review suggests that compulsory purchase of an annuity at age 75 should be removed as a requirement for pension funds.

However, Just Retirement believes that the report raises a number of concerns, such as the complexity of the investment issues and models described by the report at a time of confusion and declining capacity for risk. In addition the report does not properly recognise the existence of enhanced and impaired annuities, which give more income to those with shorter life expectancies.

Nigel Barlow, Head of Retirement Income Solutions at Just Retirement, comments: “There is a need to carefully consider all the options for income at retirement and we must beware of throwing out the baby with the bathwater. Flexibility and increased risk taking may be great for those that have large funds, typically a quarter of a million pounds or more, but the truth is that the vast majority of individual funds are nowhere near this value.

“Even the IMA’s own calculations demonstrate that it will be 28 years before someone with a Personal Account is likely to accumulate a fund of £100,000 and it is highly questionable whether this size of fund is suitable for a drawdown environment. Our own experience is that when people understand the lifetime guarantees of an annuity they are much more disposed to this solution.

“In principle, the ability to pass funds on to heirs is attractive. In reality, the issues of increasing life expectancy and levels of savings mean that most will be more concerned about outliving their own income. An annuity guarantees a secure income for life, however long that may be. It is also the simplest solution to understand thus benefiting peace of mind in retirement.”