Pensions freedoms continue to drive down annuity sales

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Pensions freedoms continue to drive down annuity sales

The new pension freedoms continue to drive down annuity sales, with enhanced annuities dropping nearly two thirds in the last four months of 2014, compared to the same period in 2013.

According to research by Towers Watson, total quarterly premiums fell by a further 13 per cent in the fourth quarter to £334.8m.

Combining the latest drop with quarter-on-quarter reductions of 36 per cent in the third quarter of 2014, 29 per cent in the second, and 12 per cent in the first quarter, total enhanced annuity sales were 65 per cent lower in the fourth quarter of 2014 compared to the equivalent period in 2013 - and 44 per cent down over the year as a whole.

Whilst viable annuity sales also fell, they have been more resilient to the fall-out from George Osborne’s March 2014 Budget announcement on pension freedoms.

Fourth quarter sales of £192.8m were 23 per cent less than in the same quarter of 2013, with total 2014 annual sales of £866.8m representing 78 per cent of the 2013 sales total.

Jeremy Nurse, a director at Towers Watson, said the reductions in annuity sales, particularly to those with reduced life expectancy, are an inevitable reaction to people anticipating greater freedom about how they use their DC pension.

“Declining gilt yields over the second half of 2014 continued to put downward pressure on annuity rates, which has only added fuel to the fire of doubt surrounding annuities at the moment.”

However, he added that the consultancy expects to see “some stability” returning to the annuity market, albeit at a lower overall sales level, once people “grow comfortable” with the nature of the guidance promised as part of the government package.

“Traditional annuity products, along with some of the more flexible annuity products already available and those being mooted in the market, will undoubtedly continue to suit the risk and tax considerations of many retirees.”

Mr Nurse added that the split by product remains to be seen. “However, the larger level of funds may offer some comfort to annuity writers, as it suggests the possibility of some recovery from current levels over time and as uncertainty recedes.”

Estimates in a recent Towers Watson study showed that inflows into the wider retirement market will reach £50bn by 2023.

ruth.gillbe@ft.com