Pensions  

Enhanced annuities fall victim to pension changes

Enhanced annuities fall victim to pension changes

A fall in enhanced annuity sales has been the inevitable consumer reaction to the approaching pension flexibilities, Jeremy Nurse, a director at Towers Watson, has claimed.

Mr Nurse 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 defined contribution pension.”

He added that falling gilt yields in the second half of 2014 had continued to put downward pressure on annuity rates, adding to doubts around the products.

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Mr Nurse’s comments came as research by Towers Watson found that UK sales of enhanced annuities to people with a reduced life expectancy were significantly lower than a year before.

In the final quarter of 2014, enhanced annuity premiums stood at £334.8m, down from £965.3m a year before.

Variable annuity premiums were also down in the fourth quarter of 2014, falling from £248.9m theprevious year to £192.8m.

This meant that for 2014, enhanced annuity premiums were £2.1bn, down from £3.8bn in 2013 and £4.4bn in 2012.

Variable annuity premiums for 2014 reached £866.8m, down from £1.1bn in 2013 and £1.4bn in 2012.

Mr Nurse said he expected to see the annuities market enjoy a return to stability, but not a full recovery in terms of sales figures.

“Riding out this storm is clearly proving painful for enhanced annuity providers, but we expect to see some stability returning to the annuities market, albeit at a lower overall sales level, once people grow comfortable with the nature of the guidance promised,” he said.

He added that traditional annuity products would continue to suit the risk and tax considerations of many pensioners.

Year

Variable annuity premiums (£m)

Enhanced annuity premiums (£m)

2007

538.7

1095.1

2008

1,153.3

1444.6

2009

1,045.4

1785.6

2010

947.5

2468.1

2011

1,094.0

3019.4

2012

1,418.3

4484.8

2013

1113.9

3846.6

Q1

233.2

982.2

Q2

310.0

915.4

Q3

321.7

983.7

Q4

248.9

965.3

2014

866.8

2169.1

Q1

232.2

847.3

Q2

212.6

600.1

Q3

229.2

386.9

Q4

192.8

334.8

Source: Towers Watson

Adviser view

True Potential managing partner David Harrison said: “My main concern is that many thousands of people on the brink of retirement now find themselves with new options that they are either not aware of or do not fully understand. In those circumstances, there is a high possibility of making the wrong decision and regretting it later.”