AnnuityApr 12 2018

State of the annuity market 3 years after Armageddon

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State of the annuity market 3 years after Armageddon

Three years on from the introduction of pension freedoms rules which blew a hole in the annuity market, the latest data reveals the extent of the UK's retirement revolution.

When pension freedoms gave people the right to take the cash from their pension pot at age 55 and spend it in any way they like on 6 April three years ago, many foresaw the end of the traditional annuity market.

And indeed, Financial Conduct Authority (FCA) data has shown annuity sales slumped in the immediate aftermath of the reforms as drawdown sales spiked. 

Hargreaves Lansdown said while about 90 per cent of people bought an annuity back in April 2015, now a mere 12 per cent are choosing an annuity, 34 per cent are remaining invested and drawing from their pension and 54 per cent are cashing in their whole pension.

Before pension freedom, annuity sales were running at about 350,000 a year, whereas today they stand at about 80,000 a year.

The shrinking demand for the products has sent ripples through the industry and so far eight providers have pulled out from the open market.

According to data from Hargreaves, only Canada Life; Aviva; Legal & General; Just; Scottish Widows; and Hodge Lifetime are currently offering annuities.

Reliance Mutual; Friends Life; Partnership Assurance; Prudential; Aegon; Standard Life; LV ; and Retirement Advantage have all left although some of these exits were the result of mergers, for instance Friends Life merged with Aviva, while Partnership Assurance merged with Just Retirement.

Despite this, Hargreaves estimates the remaining providers still have about 85 per cent of the original market share, meaning the most competitive players still dominate. 

Competition has been adversely affected in terms of consumer choice as providers left the market, and far fewer people are buying annuities, but the companies they were mainly buying them from are still there to provide them in line with demand.

While demand for annuities suffered a blow in April 2014 when the freedoms where announced by then Chancellor George Osborne, annuity rates suffered a further knock after the Brexit vote in June 2016.

By July of that year the rates had already fallen on average 3.6 per cent, leaving a 65-year-old buying an annuity worse off at that time than a 60-year-old buying one six months before.

By mid-September the rates were down 27 per cent on the 12 months earlier, according to data from Hargreaves Lansdown, but by November of the following year they had crept back up 19 per cent overall.

Hargreaves found rates had behaved differently for different age groups.

For instance, the rates someone aged 65 would get are about 2.42 per cent lower than when pension freedoms were introduced, whereas the rates at age 75 are 6.27 per cent lower. 

Annuity rate movements since pension freedom:

 

Age 60

Age 65

Age 70

Age 75

April 2015

£4,795

£5,447

£6,263

£7,547

Now

£4,680

£5,315

£6,044

£7,074

Change in rate

-2.40%

-2.42%

-3.50%

-6.27%

Nathan Long, senior pensions analyst at Hargreaves, attributed the phenomenon to the market being less competitive for those of a higher age. This was partly due to Prudential’s exit, as the firm had occupied the niche area of being competitive at older ages, he said.

Hargreaves believes demand for annuities is on the rise and that annuity sales could double by the mid 2020s, offsetting the pensions ‘dash for cash’ of late.

Mr Long pointed out while a mere 12 per cent of people currently buy an annuity, 43 per cent of people approaching retirement envisage buying one, according to Censuswide survey data the firm collected late last year.

This could tempt more providers back into the market, he said.

Phil Wickenden, managing director of market research agency Cicero Group, agreed.  

He said: “There’s no denying the short term impact of the pensions budget bombshell was immediate, significant and that initial [anti-annuity] sentiment translated directly into concerning new business figures as well as share price decimation. 

“We are now seeing the realisation that annuities will continue to play a part, even an increasing part, in the average income strategy irrespective of pot size."

But he said designing sophisticated guaranteed products was an uphill task for asset managers and insurers as long as interest rates are low.

If anything, signals currently coming from providers show a continued flight from guaranteed products.

Royal London for instance is gauging interest among its clients for transfers out of guaranteed annuity rates (Gar).

The provider wants to offer an enhanced rate to those wishing to transfer out, saying it was considering this as a way to provide a "fair value" exchange after finding last year 59 per cent of its plan holders with a Gar element, who took their retirement benefits, gave up all the guaranteed annuity rate to take advantage of the pension freedoms.

Mr Long said: “I suspect that everyone who has a big book of Gar will look at this pretty closely.”

But he cautioned: “There is no way you would not get a deal that is favourable to Royal London. 

“For most people it won’t be worth taking up but if you look at the number of people who give up those Gars it’s massive.

"And people are just taking the money as cash, which for most people is an awful decision. So for them it could be good if they get a slightly better deal.”

Advisers say they recognise the continued need for annuities but see them as poor value because of the low rates.

Kusal Ariyawansa, chartered financial planner at Manchester-based Appleton Gerrard, said: "Annuities will definitely come back, there will always be a need for certainty in the market. 

“But with low interest rates, a recommendation to lock in a low rate of income for life is short term thinking, unless someone really needs that guaranteed income."

He explained: "If interest rates go up to 5-9 per cent and you are able to buy a generous annuity, you are more likely to dedicate a portion of a retirement lump sum to meet essential expenditure."

Mr Wickenden also pointed to a shift in the way annuities will be used in the future.

He said: "Our adviser research points to the likelihood that individual products of yesterday will increasingly be combined with innovative emerging solutions to create far more personalised retirement portfolios.

"Professional advice is going to be key to making sure that people are able to meet their individual financial and, importantly, emotional needs."

carmen.reichman@ft.com