What future for annuities?

This article is part of
Retirement freedoms special report - April 2015

What future for annuities?

It didn’t take long for the markets to deliver their verdict on the implications of the 2014 Budget for the annuity market.They didn’t hang around at all in fact, as providers including Partnership, Just Retirement and Legal & General saw their share prices plummet within minutes of George Osborne taking his seat.

Annuities, so the consensus quickly went, were dead in the water. The products were unpopular and people would be eager to take control of their pensions once new legislation made it easier to do so.

But where does the chancellor’s so-called ‘pensions revolution’ really leave annuities? Will there still be a market for them and, if so, what will it look like?

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All the research points to continued demand for guarantees of the kind that only annuities can presently provide. Deloitte, for example, found that 59 per cent of savers aged 50 or over picked out a ‘guaranteed income’ as their pension priority.

Similarly, research published in January by the International Longevity Centre found that 75 per cent of DC members aged 55 or over “would prefer a secure guaranteed income over an income that might rise or fall depending on financial markets”.

The reputation of annuities has suffered a few dents in recent years, with its shortcomings exposed in a series of reports and investigations. The FCA is still on the case, launching a competition study in February on the back of a review that confirmed the market still wasn’t ‘working well for consumers’.

The problems in the market have undermined the link between the desire for a guaranteed income and the demand for annuities, according to Rachel Vahey, an Edinburgh-based independent pensions consultant (and formerly of Aegon).

“Survey after survey has shown there is a clear demand from customers for the certainty of a guaranteed income and the security that gives them in retirement,” she says.

“However, ask people if they want to buy an annuity and they are less keen. People dislike them, and the financial straitjacket they represent.”

Over exaggerated

She believes the demise of annuities has been exaggerated, however. So too does Alan Dick, financial planner and principal of Forty Two Wealth Management. He also agrees that the product has a serious image problem to overcome.

“It is interesting to note that when framed as a guaranteed income for life, people like them. However, when specifically called an ‘annuity’, people hate them.”

While there’s no doubt that annuities will remain a key part of the pensions landscape, their role will change. Phased or blended purchasing will become more prominent, with retirees using just some of their pot to buy an annuity or opting to annuitise much later in their retirement.

Mark Stopard (CORR), head of product development at Partnership, says: “The increased freedoms allow people to design the type of retirement that they want and use annuities for a variety of purposes,” he said. “We may see people manage their pension investments into their 70s before annuitising, or annuitising part of their pot in their 60s and the remainder in their 70s.”