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‘Drawdown Will Eventually Replace Annuities’, April 16, 2008 - Speech by Billy Burrows
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Posted by: Billy Burrows,
on 05/08/2008,
in category "Drawdown / ASP "
Views: this article has been read 3074 times
Introduction My many years of experience in advising Individual and Corporate clients about annuities and drawdown, advising insurance companies about product development and speaking with government and the regulators leaves me in no doubt that drawdown will continue to replace drawdown as the preferred option for many Middle Britain investors
That is providing clients get the correct advice and the industry continues developing innovative new products like variable annuities.
In one sense annuities and drawdown are opposite sides of the same retirement income coin.
On the annuity side, income is guaranteed for life, come what may, and therefore they provide peace of mind and security - but this comes at a price – investors are locked into current gilt yields and there is no flexibility to change the annuity options if circumstances change in the future.
On the other side of the coin is drawdown, where investors give up the annuity guarantee in order to have more choice, including:
Income flexibility Control of investment Choice of death benefits
So how does an individual decide whether to buy an annuity or drawdown? The answer is by carefully weighing up the advantages and disadvantages of each option.
We can cut to the chase: - There are two reasons why many investors prefer drawdown to annuities:
1. Drawdown can provide a lump sum death benefit whereas when annuitant dies, the annuity income stops – however don’t forget many annuities are joint life annuities so income only stops on the death of the 2nd annuitant.
2. Many investors think that can invest in a way that will provide superior returns compared to an annuity – that is investing in equities is better than investing in bonds
These two charges against annuities were most eloquently articulated by Lord Grantley speaking in a House of Lords debate on pensions in October 1997 when he said: "In my view, there are two overwhelming reasons why people should not invest in annuities under any circumstances.
The first is that investing in annuities is contrary to the interests of a family . . . in that they are worth nothing when the investor dies.
The second reason is simply that annuities are a lousy form of investment."
I challenge my friend who is opposing the motion to argue against this. What he can say to defend annuities against these criticisms?
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