Annuity business drops

Many annuity providers have found themselves in a poor financial position as the dust settles in the wake of George Osborne’s shakeup of the market.

The annuity space has been hit hard, with losses reported across the board in terms of annuity business.

Enhanced annuities provider Just Retirement announced its intentions to cut costs to the tune of £14m in the knowledge its sales volumes would drop after the Budget changes. Legal & General offered an extended cooling-off period in the weeks following the Budget for anyone who recently bought an annuity, and around £15m of business was cancelled during this time. Prudential announced it experienced a 35 per cent fall in sales of individual annuities after the Budget, while Standard Life’s annuity sales fell by 50 per cent, according to its most recent interim results.

Many financial losses incurred by annuity providers need to be seen in the context of good profits across the companies as a whole, and in many cases are more indicative of trends for the product as opposed to the providers.

Legal & General, for example, reported its highest-ever first quarter results for the beginning of 2014. It is clear in light of these figures that consumers need to re-establish their trust in annuities as a product.

None of these figures are quite dramatic enough to back up the prediction by analysts at RBC Capital Markets, who said shortly after the Budget that the market would shrink by 90 per cent, but still mark a dramatic difference in the choices consumers are making. The Treasury Select Committee’s assessment of the changes to the retirement market established that there would be a place for annuities in the pensions industry on an ongoing basis.

Richard Ellis, financial planner at Fraser Heath in Bristol, is increasingly finding that he is encouraging clients away from annuities. “We still start with the client’s personal circumstances, as with any advice. When we get to the position where we’ve looked at risk, any other income and allowances, I’m finding a lot more that the annuity route is not the answer, even for a low-risk client who wants a secure income,” he says.

He added that after the initial fall in annuity sales, he believes the product will continue to fade away as poor takeup will hurt annuity rates since the providers will have lower profits.