Retirement product providers are being forced to choose between annuities and drawdown, as non-specialists struggle to compete in a dramatically cooling annuity market, research by Moneyfacts suggests.
Last week, insurance giant Prudential revealed it was exiting the annuity market to focus exclusively on income drawdown products in its retirement business.
The announcement came after it emerged Prudential was consistently offering some of the least competitive annuity rates on the market.
Following the announcement, Moneyfacts shared figures with FTAdviser that revealed the companies offering the best value annuities now tended to be specialist providers, while those offering a selection of annuities and drawdown products tended to offer the worst rates.
The figures showed that for a lump sum of £50,000, companies like Canada Life and Hodge consistently offered the best annuity rates across most age ranges.
Moneyfacts said neither firm was a major income drawdown provider.
Meanwhile, firms like Retirement Advantage and Prudential - both of which have extensive drawdown businesses - consistently offered the worst annuity rates.
An exception to this was Aviva, which continued to offer competitive annuity rates, including the best rate for people aged 75.
Richard Eagling, head of pensions at Moneyfacts, said: “Annuities have long been a core component of most life insurers product range but it is clear that this is no longer the case.
"A growing number of traditional insurers are focusing on their income drawdown propositions and other retirement solutions instead of annuities."
He said the recent exits of Aegon, LV , Prudential and Standard Life from the annuity market meant it was "looking increasingly likely that the annuity market will become a specialist market, comprising only those providers who will specialise in retirement income options".
This, he said, meant savers would increasingly be unable to buy an annuity from their pension provider.
Kim Lerche Thomsen, who set up Prudential's annuity business in the 1990s before leaving to found Primetime Retirement, agreed that annuities were becoming a specialist product.
He said weak demand combined with the risk associated with writing annuities meant the major players would naturally be drawn away from them.
"It's much easier to offer investment-linked linked drawdown," he said.
He added that offering consistently poor rates was often a first step towards exiting the market altogether.
However, he told FTAdviser that once pension freedoms had settled in and interest rates had risen to more normal levels, demand for lifetime annuities would come back.
But their role would revert to more of a traditional insurance product, providing protection against longevity rather than an income throughout retirement.
"A lifetime annuity for people in good health is not really necessary until you are over 80," he said.
He added that his company, which currently specialises in fixed-term annuities, would consider entering the lifetime annuity market on this basis, if the demand was there.
james.fernyhough@ft.com
