The Organisation for Economic Co-operation and Development (OECD) has launched a scathing attack on the UK Chancellor, George Osborne’s plan to abolish the obligation to purchase an annuity upon retirement.
From April 2015, savers will be able to take their entire pension as cash instead of being forced to buy the ‘income for life’ represented by an annuity plan.
The OECD has claimed that the majority of pensioners will run out of money in old age if they are allowed to withdraw their entire savings in one go, the domino effect of which will simply plunge the country into deeper financial crisis.
The proposal is seemingly driven by the lack of flexibility and the extortionate charges which the providers declined to renege on. Their dominant place in the market had for years seen no challenge, essentially allowing them to impose whichever charges and restrictions they saw fit. The Government, it appeared, grew impatient with this tactic, and as a result has given the option back to the British public, an option which the majority will keenly exercise.
A representative from the OECD, Mr Antolin said that “An annuity is the only instrument that provides complete protection in retirement and which safeguards individuals against the danger that they exhaust their savings before death.”
Rather than completely do away with annuities, the OECD would rather see partial annuity purchase with a percentage of saved funds.
While the OECD did accept that the reasons for the annuity-related reforms were partially due to the expensive nature of purchasing this kind of product, the published notes also suggested that savers were unlikely to find any greater returns or interest anywhere else.
Finally, Mr Antolin stated that ‘an annuity is a form of insurance, not an investment product.” This is very much true, with the notion of making huge returns on any kind of annuity almost laughable, they are really designed to insure against outliving one’s own resources. Quite simply, an annuity should guaranteed an income for the remainder of the ‘investor’s’ days.
The justified fear across Europe, and especially with the OECD is that the UK is facing up to many in old age being unable to support themselves due to drawing their entire savings upon retirement. Exactly how the government plans to deal with this inevitable consequence of its relaxation of regulation, remains to be seen.