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Impact of the Budget on annuity providers

This article is part of
Guide to Annuities Post-Pension Freedoms

As the months have gone by since the Budget bombshell, successive sets of financial results have revealed all providers have witnessed a reduction in annuity sales this year.

Competition among annuity providers remains strong though, according to Alistair McQueen, pensions manager at Aviva UK, who adds many people will continue to see the annuity as their preferred option in retirement.

He says: “The new rules, however, will bring greater choice to all retirees and the market will continue to develop in response to customer demand. It will probably take a few years for the shape of the new retirement market to settle.”

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However, while there is little certainty over the fate of the market - some even say it has ‘bottomed out’ already - and some annuities will continue to be sold, most agree sales volumes will be less, especially as smaller-pot clients opt to take their fund in cash.

The resulting shift in demographic profile will potentially have profound consequences to the rates on offer. Some say the annuity market and the rates available to your clients have already been negatively hit by the proposed changes.

While the Budget had little impact on competition in terms of the number of providers offering annuities and rates for standard rate annuities - which have reduced largely down to the fall in gilt yields - Richard Williams, director of The Annuity Bureau from JLT, says impaired life rates have particularly suffered over the period.

He says this is likely to do with the volatility felt in the market for enhanced annuity providers Partnership and Just Retirement, whose share prices suffered immediately following the Budget announcement. Respectively the firms are still languishing at around a quarter and less than a half of their March peak value.

Mr Williams says what is clear is that annuities are now not the only thing on the minds of providers, and it is unlikely there will be a huge push to write annuity business while providers look to develop and innovate their propositions.

Many providers have sought to get into ‘bulk annuities’ - big-ticket deals to provide the income pledged to defined benefit scheme members - in the short term, with plans to launch the likes of unit-linked guarantees longer term to offer a middle road between guaranteed income and flexibility.

Looking to the future, Mark Stopard, head of product development at Partnership, says he believes there will continue to be a market for annuities as consumers continue to want personalised products that guarantee an income irrespective of how long they live.

Changes could result on more portfolio-style solutions, he adds, with people using part of their part to buy an annuity to cover their essential expenses, rather than annuitise wholly to provide the sole retirement income.

Mr Stopard adds what is clear is the shape of the market will change.