So Where Will Pension Pots Go if Not Into Annuities?

Baker Tilly, a leading national provider of accounting and business services, explores options such as bricks and mortar for your pension pot after the Budget 2014 bombshell.

Now that the dust has begun to settle after George Osborne’s totally unexpected pension’s bombshell, people are beginning to take stock of the longer term ramifications. Not least amongst these is how the 420,000 Britons who usually buy some £14 billion worth of annuities every year are going to respond.

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This is a vast amount of money and it is already quite clear that the annuity providers’ loss is going to be a major gain for certain other industries. So who might these be? Where are all the pension pots going to go if not into traditional annuities?

Well, first of all, we can’t automatically assume that annuities are dead in the water. When interest rates and investment yields go back up to something like normal levels, an annuity might still be an attractive option for people who aren’t too bothered about leaving a large inheritance, are risk averse and who prefer to leave investment selection to the professionals. The only problem is that people are now living much longer and, even in a higher interest rate environment, annuity rates might be depressed by the diktats of actuaries who watch life expectancy statistics like hawks.

The most likely asset class to feel the impact of the likely sea change in the pensions landscape is likely to be the UK’s long term investment of choice – bricks and mortar. It is virtually certain that the buy-to-let market is destined to boom as pension pot money floods into residential housing. The problem with this is, of course, that soaring demand will inflate prices and deflate yields which rather defeats the object of the exercise. Furthermore, there could be a political backlash if hundreds of thousands of pensioners start crowding out first time buyers.

Nevertheless, one can foresee the possibility of scores of Real Estate Investment Trusts (REITS) being set up specifically with retired people in mind. We might even see the advent of higher yielding property investments being presented to the pensioner market in some kind of annuity wrapper.

The same could be said of higher yielding equity trusts which traditionally offer better long term income and capital growth than fixed interest government stocks. These are already hugely popular with elderly investors who rely on income rather than on capital growth.

The problem is that there is only a finite supply of assets that are capable of providing above average income combined with reasonable security. With upwards of £14 billion looking for such a home every year, over and above normal demand, there is a danger that sheer weight of money will bid asset prices up to levels at which yields suddenly become mediocre.

Part of the solution may lie with the government who could issue instruments like the new Pensioner Bonds yielding 4% p.a. It has the capacity to underwrite very large issues of stock which is not only attractive to pensioners but could go a long way towards financing major infrastructure projects.

To stay aware of the issues and concerns that matter to you surrounding pensions visit the Baker Tilly website


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