Embattled annuities providers could have been thrown a lifeline by the Treasury in a series of updates to the arcane rules governing policies announced alongside the confirmation of a broader pensions liberalisation that would enable greater flexibility and choice in product design.
Publishing the results of its consultation into new pension freedoms yesterday (21 July), the government also confirmed it would remove a 10-year cap on the length of time annuity payments can continue to beneficiaries after death, and relax rules that currently preclude any reduction in lifetime annnuity income.
While moves to increase ‘at-retirement’ options to taking pension as a cash lump-sum or opening up income drawdown products had been thought likely by many to spell the end of the single annuity market, providers believe the tax changes may throw the market a bone.
The removal of the 10-year cap on guarantee periods could make annuities more attractive to couples, for example. Of course, any increase in the guarantee period would be reflected in the rate of income offered.
New rules will also allow payments from guaranteed annuities to be paid to beneficiaries as a lump sum where they are under £30,000, meaning beneficiaries could receive pension payments as a single windfall rather than having to spread them out over several years.
Other changes will allow more fertile ground for providers to create annuities tailored to client needs. For instance, income levels on an annuity could be set to be higher at outset and then reduce once an individual becomes eligible for the state pension.
The Treasury said it would also allow lump sums to be taken from lifetime annuities, on the condition that this is specified in the contract at the point of purchase. This will allow providers to structure products that are capable of meeting specific circumstances, such as care needs.
Stephen Lowe, Just Retirement’s group external affairs and customer insight director, told FTAdviser that he was happy that the Treasury had removed some of the biggest “handcuffs” from annuity providers.
Mr Lowe added the tax changes helped to level the playing field between annuities and drawdown products.
He said: “It’s a vote of confidence in customers continuing need for secure income and this gives the flexibility for providers like us and others to do slightly different things that may give customers different options.
“Given that 10-year maximum has now been torn up it is now possible to create an annuity which guarantees to ensure the client receives all of their original capital back. The caveat is that we won’t see the detailed tax legislation for another two weeks, so it’s only then that we’ll be able to see whether what they’re saying can actually be done in practice.”
Andrew Tully, pensions technical director at MGM Advantage, said more flexibility for annuities was long overdue.
He said: “People want flexibility but with a guarantee as well, the problem in the past with most annuities was that income remains static throughout retirement and that doesn’t match with people’s expenditure.
“This should mean that we should be able to design new annuities which give people a bit more flexibility to shape their income to suit their circumstances.”
Alastair Black, head of customer income solutions at Standard Life, added: “On the basis drawdown is already very flexible the proposed changes to give annuities additional flexibility are a positive move which will give consumers more choice.”
However, Steve Patterson, managing director at Intelligent Pensions, was not so positive about the move.
He said: “When people look at the cost of building in a guarantee, they may find it too expensive. In reality, people have a shortfall in their retirement savings so a guarantee may be seen as an expensive add-on.”
In the wake of the original policy announcement by the chancellor in March, specialist annuity providers including Just Retirement and Partnership were hammered on public markets as expectations grew that the market would shrink by anywhere up to 90 per cent.
In the months since, MGM Advantage announced that it had made 80 staff redundant while Just Retirement said it would be cutting costs by £14m a year. Many providers, including Partnership, have signalled they will be expanding their product range.
Mr Lowe said the annuity market had been hit in the short term, with mainly only those not taking advice and defaulting into existing insurance company options buying annuities in the current market.
Mr Tully concluded that while people do not have to default anymore, he was still optimistic of a strong annuity market in the future especially as a result of the changes, although it would have to be driven by providers creating compelling products people want to buy.
He said: “Undoubtedly the annuity market has reduced and will be lower in future, but equally that doesn’t mean that nobody will buy an annuity, it’s still one of the tools an adviser can use.”
