Experts raise questions over HMRC predictions on annuity take-up rates

A back of the envelope exercise was how some critics described George Osborne’s Budget announcement, which dramatically loosened the restrictions on how retirees could use their savings cash. Civil servants and industry figures have since been working hard to fill in the blanks left by the Chancellor of the Exchequer. 

Last week, the HMRC published the draft Taxation of Pensions Bill, which will be the vehicle for implementing Osborne’s reform. The HMRC forecasts that the proposed changes will net an additional £3.8bn of revenue for government coffers over the next five years.

The same document also contains the government’s first assessment of the number of individuals that it expects to take advantage of the new flexibilities surrounding retirement income. HMRC predicts that 130,000 will do so, which represents just under a third of the 400,000 retirees who currently buy an annuity.

Given that around 130,000 people currently either take cash or drawdown, this means that the government expects roughly half of all retirees to take this route. Of course, it also implies that officials believe around half of the DC population will continue to lock into an annuity.

One half looks a little too neat for comfort, as well as appearing to be out of kilter with the evident enthusiasm that the new freedoms have sparked in the general populace.

It’s pretty clear that people want their cash upfront: these things are going to fly

John Cockerton, senior consulting actuary at Towers Watson, believes that the man in the street perceives annuities as poor value product and that there will be plenty of appetite for the new flexible access drawdown (FAD) products.

He says: “It’s pretty clear that people want their cash upfront: these things are going to fly.”

Once the pension providers have evolved what he describes as Ford Mondeo, mid-market versions of what are currently Rolls Royce FAD products, Cockerton believes the pace of this take-up will intensify.

Mel Duffield, deputy director of the Pensions Policy Institute, says that in the Republic of Ireland around 30% of the population annuitises. Given the more advanced nature of the UK’s annuity market, she thinks it is feasible that British providers will be able to offer more generous rates, such as through enhanced annuities, which could lead to better take-up rates than in Ireland.

There is no evidence: that’s what makes this a risky policy development

However Richard Butcher, managing director of Pitman’s Trustees Ltd, is less sanguine. Given that the average size of a pot at retirement, currently around £30,000, is likely to shrink due to the auto-enrolment of lower paid workers, he believes the vast majority of retirees will take cash rather than waiting to buy an annuity.

But he argues that part of the problem surrounding this debate is that is being largely carried out on the basis of guesstimates.  “There is no evidence: that’s what makes this a risky policy development,” he says.

The government is making some big calls about long-term retirement issues without apparently having the proof to back its hunches.