It is almost 10 years since former chancellor of the exchequer George Osborne famously announced that, once pension freedoms were introduced, “no one would have to buy an annuity”.
At that moment, it was widely assumed that this long-established retirement income product would become obsolete.
Fast forward a decade and sales of pension annuities are rising again. Spurred on by rising interest and inflation rates, retirees are finding that annuities, which provide a guaranteed income for life, are once again offering greater returns than those offered in 2015.
Unsurprising then that the Association of British Insurers recently reported that the number of annuities sold in the first half of 2023 increased 27 per cent, compared with the same period in 2022.
Why the shift to annuities?
The resurgence in annuity sales is not a coincidence. It is a reflection of how market dynamics and financial reforms have rekindled interest in this classic retirement product.
The first trend we have seen is the increase in cases coming to the open market (the 'open market option' or 'OMO') – this is the choice a customer has to buy retirement income products from another company that is not their current pension provider, where they may get better value.
At Scottish Widows, in the first half of this year, we have seen a doubling of OMO case volumes, typically cases advised through an IFA or sourced through brokers.
The second is an increased appreciation of the value of the annuity guarantee as a result of recent market volatility.
The sustained rise in costs of living has seen more individuals seek out the benefits of longevity protection.Inflation, economic uncertainty, the decline of the defined benefit pension, and greater IFA awareness of the higher annuity rates currently on offer are all combining to make annuities even more attractive in the face of rising living costs and a trend for us all to live longer.
So perhaps this revival of popularity should come as no surprise.
The sustained rise in costs of living has seen more individuals seek out the benefits of longevity protection.
And in the past few months alone, we have witnessed a substantial jump in interest rates, which has led to better deals on the annuity market; it is now possible for a 65-year-old to get £7,100 each year if they invest £100,000, compared with £5,500 just 12 months ago.
How long will the appeal of annuities last?
One might question whether this resurgence is fleeting or if annuities are here to stay. The answer lies in the lessons we have learned from history.
The decline of annuities following pension freedoms in 2015 reflected a shift towards flexible retirement income solutions. However, this trend is now reversing.
According to the Financial Conduct Authority, the reported sales of annuities rose in 2021-22 by 13 per cent (60,383 in 2020-21 to 68,514 in 2021-22).
However, it is not just annuities alone that are appealing. A blended approach has started to appear, involving a combination of an annuity, providing an element of guarantee, plus drawdown, where the pension savings remain invested and an income can be withdrawn as needed.
This has been hailed by individuals, financial brokers, and advisers – for instance, by combining state pension and an annuity, people can cover their fixed costs with the rest of the fund benefiting from flexibility and growth potential of drawdown for the non-essentials.
The Bank of England’s forecast that the cost of borrowing will remain high for at least the next two years, as it raised interest rates for the 14th consecutive time to 5.25 per cent, also reinforces the idea that annuities will likely endure for at least a few more years.
So while the pendulum of popularity may sway over time, the growth of pension pots in the wake of auto-enrolment and the understanding that a mix of annuities and drawdown can lead to better outcomes supports the belief annuities will persist as a compelling proposition for retirees in the longer term.
Why should people consider annuities?
So, why should individuals consider annuities among a myriad of retirement options? It’s all about reliability.
While specific scenarios such as needing a large lump sum in early retirement or inheritance planning might call for alternative approaches, annuities serve as a steadfast choice for those seeking a reliable income foundation.
Yet, there remains a challenge to overcome: the disconnect between enthusiasm and action.
In my experience, clients often express enthusiasm for guaranteed income but hesitate when it comes to purchasing annuities.
Incorporating a mix-and-match strategy into a client's retirement plan can provide a more tailored solution.Annuities deserve a rebrand; a renewed commitment from the industry to educate the public about their value and their rightful place in retirement planning.
Overall, the re-emergence of annuities as a retirement strategy underscores their value in times of uncertainty. The symbiotic relationship between annuity rates and economic conditions creates a dynamic that can provide retirees with a reassuring sense of financial security.
While the appeal of annuities might fluctuate, the understanding of their potential as a stable foundation of a diversified retirement portfolio is gaining ground.
With this in mind, incorporating a mix-and-match strategy by integrating a guaranteed income for life, such as an annuity, into a client's retirement plan can provide a more tailored solution.
It can cater to both immediate and long-term financial needs, surpassing the traditional choice of either/or options.
Emma Watkins is managing director – retirement at Scottish Widows
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