Before I gallop ahead and look at the outlook for 2014 it will be useful to reflect on 2013. What a difference a year makes. In December 2012 the industry was in frenzy over gender neutral annuity pricing with some commentators predicting cuts to male annuity rates of up to 10 per cent. A year later we look back and wonder what all the fuss was about as annuity rates have risen by more than 9 per cent in the course of the year. I was cautioning people not to rush into buying annuities just to beat the gender neutral deadline because I thought rates were artificially low at the end of 2012.
A year ago we were prophesying about the likely effects of RDR and concerns that middle Britain would perceive advice as being complex and expensive. In my view much of what was expected has happened, especially the rise in non-advised annuity broking services and much confusion in the eyes of the customer.
In order to make some sense of this rapidly changing market and to make some realistic assumptions for 2014, I will look at three key parts of the retirement income market: the outlook for annuity rates, trends in distribution and opportunities for product development.
Conventional annuity rates increased by about 9 per cent during 2013, reflecting the rise in the yields for gilts and corporate bonds. Enhanced annuities rates also increased in 2013 and this is the fastest growing part of the market.
This means 2013 was one of those rare years when not rushing to arrange an annuity would have paid dividends for those who took their annuity purchase decision more seriously.
If the outlook for annuities is similar to the weather forecast – “it will be similar to yesterday unless there is a storm” – we can expect annuity rates to nudge upwards unless there are significant and unforeseen events in the financial markets.
However there are two forces acting to slow down the rally in annuity rates. First, the increase in gilt yields has slowed down as the financial markets sense the end of quantitative easing might be in sight. Second, the prospects of an early rise in interest rates have been dashed after the ‘forward guidance’ policy set out by the governor of the Bank of England.
Therefore it seems likely that annuity rates will not rise as fast in 2014 as they have done so during last year.
In terms of distribution, perhaps the biggest shake-up will come about as a result of increased take-up of the open market option. In 2014 a number of initiatives should bear fruit. The Association of British Insurers’ code of conduct will continue to increase the awareness of the open market option, the FSA thematic review on annuities should spur companies to offer better value to annuitants and finally the Pension Income Choice Association directory will steer customers towards firms which can help them get a better annuity rate.
If ever there was a time for innovation in the annuity market it is now. With many people experiencing more complex patterns of retirement that require more flexibility and control, the traditional annuity is not meeting all the needs of today’s pensioners.
One interesting development may be ‘portfolio annuities’. That is, annuities invested in more than one policy. One example of this is the so called 80/20 annuity where 80 per cent is a guaranteed annuity and 20 per cent is an investment-linked option.
This combination of policies provides the client with a core guaranteed income with a small element that provides potential for future income growth and flexibility. Twenty per cent invested in a with profits annuity will only provide limited flexibility but it is a positive step in the right direction.
Billy Burrows is head of business development at Annuity Line
