There has been some excitement at the thought that pensioners will be able to blow their pension pots on a Lamborghini, rather than buying an annuity. There may be some problems with this arrangement – no doubt the sharks will be circling at the smell of money in the water – but somehow the idea that pensioners will be lining up to buy cars that cost £300,000 and do 11 miles per gallon doesn’t quite square with the experience of most of the older people I’ve ever met.
I can make no great claim to understand the annuities market, but there are reasons to doubt that this week’s Budget has knocked the bottom out of it. According to the Association of British Insurers, the numbers of people who take out large annuities is very small. Most pots are limited; many annuities – more than 100,000 a year – are bought for less than £10,000; the median pot is around £20,000. They explain that an investment of £5000 will typically secure an income of £20 a month.
Much of the trade seems to depend on the idea that someone who is looking for a range of investment options will be able to use part of that money to guarantee a fixed income. On that basis, the most likely outcome of the change in rules is that, as workplace pensions grow, more people will use part, rather than all, of a pension pot to guarantee an income. If they like the idea, they can start small and decide later to buy more income.