Relaxed Annuity Rules to Help Many, But Not Pre-Retirees

FUTURE PROOF: New rules mean more flexibility for retirees but those who have already de-risked their portfolio may see little benefit

Cherry Reynard 16 April, 2014 | 9:53AM
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The Government has extended its relaxation of the annuity rules to those on the cusp of retirement. It announced that those who had taken their tax-free lump sum immediately prior to the budget will no longer have to buy an annuity within six months. This frees thousands more retirees from the obligation to buy an annuity, but there are important investment considerations for the retirees in this bracket.

The general rule has been that investors lower risk in their portfolios in the years running up to retirement. This has meant reducing equity and corporate bond exposure gradually, moving into UK government bonds, on which annuity prices are based. This minimises market risk at the point of retirement – investors phase their exit from higher risk, higher volatility markets and therefore minimise the chance of exiting at the wrong point in the market cycle.

No Need to De-risk

The removal of the obligation to buy an annuity should force investors to reconsider this shift. If they are not moving into a gilt-based product at retirement, there is no longer a need to de-risk in the same way. This is particularly pertinent at the moment, when gilts continue to look poor value as interest rate rises loom.

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About Author

Cherry Reynard

Cherry Reynard  is a financial journalist writing for Morningstar.co.uk.

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