LV plans withdrawal from enhanced annuity market

The announcement came a few days after Standard Life announced it would stop selling annuities on the open market, and a few months after Aegon announced it was selling its entire annuity book.

LV said two factors were behind the proposal: pension freedoms, which took away the requirement for retirees to use their pension savings to buy an annuity, causing demand to plummet; and record-low interest rates and bond yields, which were heavily depressing annuity rates.

However, a spokesperson for LV stressed that, while the firm believed the proposal to pull out of enhanced annuities "made sense", the final decision depended upon the outcome of a consultation currently underway with LV employees.

Like standard annuities, LV's enhanced annuities pay a guaranteed income for life. They differ from standard annuities in that they are tailored to the customer's personal circumstances, allowing customers to boost their income if they are in poor health or leading a lifestyle likely to shorten their life expectancy. 

Instead of viewing retirement as a one-time event, people are increasingly looking at shorter time horizons and seeking more flexibility.John Perks

John Perks, managing director of retirement solutions at LV, said the pensions market had "changed considerably over the last 18 months", since the introduction of pension freedoms. 

"Instead of viewing retirement as a one-time event, people are increasingly looking at shorter time horizons and seeking more flexibility in their retirement income," he said.

He said an ongoing low interest rate environment was depressing annuity rates, a trend that was made worse by the impacts of Solvency II capital requirements.

This, he said, meant LV annuities were no longer providing "good value for customers".

"We believe it makes sense, therefore, for LV to focus on a mixture of safe drawdown products, fixed-term annuities, guaranteed funds, investments and equity release,” he said.

Sean Irwin, a financial adviser with DFP Wealth Management, said it was “concerning” that so many life companies were withdrawing from the annuity market.

“When interest rates do eventually increase, annuities may become a better proposition than they are at the moment,” he said.

But by that stage, he said even more players may have been pushed out of the market.

“If the trend away from annuities carries on for a long period, it’s not going to be financially viable [for many companies to offer annuities].”

That, he said, would seriously damage competition.

Tom McPhail, head of pensions policy at Hargreaves Lansdown, agreed, saying the annuity market had been hit by a "perfect storm".

“The risk to investors is if this trend continues, one day soon the UK may not actually have a viable annuity market at all. That would be bad news for millions of pension investors who will want to buy a guaranteed income in years to come.”

He said to avert more withdrawals from the annuity market, the government could consider issuing higher-yielding gilts specifically for use by annuity companies to support better returns to investors.

james.fernyhough@ft.com