L&G predicts Solvency II will make drawdown more attractive than annuities

Savers are preparing to abandon annuities in favour of income withdrawal and other drawdown products as new European legislation forces up the cost of conventional retirement products, according to Legal & General.

Kerrigan Procter, head of the solutions group at Legal & General Investment Management, said a broader workplace savings model would replace conventional annuity products as stringent capital requirements under Solvency II regulations make annuities prohibitively expensive.

‘From October 2012 insurers will be treated more punitively for investing in credit which will make annuities more expensive. People will use annuities less and income drawdown more,’ Proctor said.

Supporting Proctor’s views, David Hutchins, head of defined contribution at AllianceBernstein, said income withdrawal would account for 50% of the UK’s retirement market in the next five years, as traditional annuity products appear less suitable for people facing 20 or more years in retirement.

‘Income withdrawal is much more suitable for young retirees aged around 65; annuities should come much later,’ Hutchins said.

However he noted that income withdrawal under its current guise represented a complex investment decision which deterred savers from taking this option because they were unwilling to pay for appropriate investment advice.

Hutchins proposed creating a default income withdrawal product that automatically set drawdown amounts and took investment decisions on behalf of the member.

‘Embedded advice in income withdrawal products would help to keep costs down and make it easier for individuals to take this option,’ Hutchins added.

He also said the uptake in income drawdown products would ease some of the pressure on the bond markets since more retirees would be invested in the equity markets and other real asset classes.