What has happened to the annuity market post-pension freedoms?

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Annuity advice post pension freedoms

What has happened to the annuity market post-pension freedoms?

The pension freedoms took many providers and advisers in the pensions market by surprise but the changes have perhaps been most keenly felt in the annuity market.

The then chancellor George Osborne’s budget speech back in March 2014 gave investors more responsibility when he revealed they would not have to hand their pension pot to an annuity provider at retirement age but could opt for income drawdown instead.

In the immediate aftermath share prices of some of the UK’s biggest annuity providers, such as Legal & General and Aviva, tumbled by as much as 8 per cent as it became clear those reaching retirement would no longer have to buy an annuity to fund the final decades of their life.

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In short, the annuity market has gone from annual sales of around £11bn in the UK to around £4bn today.

The decline was anticipated by many in the industry so while the latest annuity sales data is stark, it is not entirely surprising.

Down but not out

Fiona Tait, pensions specialist at Royal London, quotes figures from the Association of British Insurers (ABI) which shows annuity sales have declined by around 80 per cent since the announcement of pension freedoms in 2014, and have remained around that level. 

She points out how the sales figures compare with 74,092 annuities sold in the quarter immediately before the announcement of pension freedoms, down to 18,243 sales in the quarter immediately after they came into force (the second quarter of 2015). 

The latest sales figures - 20,803 in the third quarter of 2016 - are still only at 22 per cent of the pre-freedom levels. 


Source: Iress Retirement Report

Andrew Simon, executive general manager, product at Iress, explains: “The pension freedoms were designed to give individuals greater control over how they use their fund to meet their specific retirement needs.

“A key aspect of this increased control is being able to access the fund largely as the individual wishes, subject to a few restrictions. For some this means taking some, or all, of the fund as a cash withdrawal.”

He continues: “For many, the pension freedoms simply mean no longer having to purchase an annuity with other, more flexible options appearing more attractive in comparison. 

“These options include guaranteed products such as unit linked guarantees, where income is guaranteed but not the capital, or guaranteed drawdown, a combination of annuity and drawdown, equity release or fixed-term annuities. This shift started as soon as the pension freedoms were announced.”

Falling rates

There is more to the decline of annuity sales than the pension freedoms though, as Andrew Pennie, head of pathways at Intelligent Pensions points out.

“Overall, annuities have been vilified by the media and politicians and as a consequence the public has fallen hugely out of favour with the idea of buying an annuity,” he suggests.