Falling annuity rates could drive people to drawdown

Falling annuity rates could drive people to drawdown

Falling annuity rates will drive people towards drawdown, Aegon UK’s Steven Cameron has warned.

The company’s regulatory strategy director said annuity rates had fallen 6 per cent since the start of the year.

Mr Cameron said: “This is primarily a result of investment yields falling further.

Article continues after advert

“At the moment, these yields are at a historically low level. This and continued improvements in life expectancy are the key reasons why annuity rates are also lower than in previous years.

“With the incomes people can secure through an annuity currently at historic lows, individuals may be more likely to consider the alternatives they have under the new pension flexibilities that came in on 6 April.”

Mr Cameron said long gilts and bonds would typically generate yields of just over 2 per cent today meaning a 60-year-old in good health with a fund of £100,000 might get an annuity, which increases in line with inflation, of approximately £2,400 a year.

But he warned that there is a “clear trade-off” between taking out an annuity and going into drawdown.

He said: “On the one hand annuities are inflexible and rates are currently low. However, they do provide a guaranteed level of income for life.

“On the other hand, drawdown provides flexible investment options and the opportunity to vary income levels, but people need to decide how much income to take to avoid a situation whereby they run out of money.

“Many people may choose to have some of both.”

He added that, to better meet customer needs, the industry should expect to see new forms of flexi-access drawdown products that offer some form of guarantee that money will not run out.

However, to implement such products and cope with the complexity that flexi-access drawdown might bring, the industry will need to get its systems up to scratch, according to Stuart Heatley, sales and client development director for Capita Employee Benefits.

He said: “The important role of supporting software was highlighted following the pensions freedoms, which included the introduction of FAD – a new form of accessing a pension, with no cap on the amount that can be withdrawn each year and no minimum income requirement.”

Adviser view

Malcolm Steel, director of Edinburgh-based Mearns & Co, said: “I think falling annuity rates will indeed push people towards drawdown, which is tricky because an unsecured pension is not the right thing for everyone.

“In our view there is still a place for annuities, but it is tough.”