Is there still a market for annuities?

The appeal of income drawdown for many retirees has left the annuity market in the shadows.

But could there be a new market for annuities, or simply many at retirement who simply do not want to take the risks associated with stockmarket investments? If so, will this be enough to sustain an annuity market in the UK?

Andrew Tully, pensions technical director at Retirement Advantage, believes there is a market.

He suggests: “Annuities continue to meet the need of the majority of retirees who don’t like to take risk, especially for many people in the ‘middle market’ with pension pots of between £30,000 and £250,000.

“Our research tells us 29 per cent of people approaching retirement want to take no risk at all with their pension savings. The only sensible option for these people is some form of guaranteed income for life.

"Other customers may well want or need some element of certainty to cover their essential outgoings while retaining flexibility with the remainder of their savings. Annuities continue to be the only guarantee of an income for life.”

They eliminate anxiety over ‘making your money last’ as they pay a guaranteed income for life and some will even continue paying out to partners on the death of the original holder.Jinesh Patel

“Even though some providers have pulled out of providing annuities, there are others who are absolutely committed to the market and to developing the product to meet consumer demand,” Andrew Simon, executive general manager for product at Iress, explains. 

“There is still a market for annuities in a post-freedoms world. While the challenges around retirement income should not be underestimated, individuals now have more choice and control than ever before.”

Poor image

That choice, it seems, has rather sidelined annuities.

He acknowledges in the sustained low interest rate environment of recent years means annuities have suffered from a poor image. 

“But demand has stabilised and we are confident that annuities remain a key component of retirement income planning,” he says. “If interest rates rise, we would expect to see annuity rates and demand increase.”

Jinesh Patel, vice-president, investment consulting at Redington, lists further benefits provided by guaranteed income for life products such as annuities and confirms they can be a valuable option.

“They eliminate anxiety over ‘making your money last’ as they pay a guaranteed income for life and some will even continue paying out to partners on the death of the original holder, providing financial certainty at a time when you might be unable to supplement your income otherwise,” he says. 

And he points out while the current low rates offered on annuities are not helpful, those who do take them out could end up protecting themselves from future market fluctuations.

But Mr Patel argues the market does need to become more competitive and creative in order to prosper, starting with decent annuity rates to make the products more attractive to those considering other options.

A good pension freedoms market needs a good annuity market to allow the full spectrum of income opportunity.Mike Morrison

“Perhaps an increased range of enhanced annuities, for instance, as well as the ones typically offered to smokers and those with serious illnesses,” he observes. 

“Rates could be calculated and graded according to willingness to bear risk across several areas of life – a relatively reliable marker of life expectancy.”

Providing a bridge

He also points to a growing market for ‘bridge’ solutions – “an annuity-drawdown hybrid”. 

Says Mr Patel: “These offer the flexibility of drawdown but with some of the guarantee of an annuity. However, they are currently only really attractive for those with sizeable pension pots.

"More could be done to widen their reach, particularly among certain groups, including those who intend to carry on working, perhaps in a reduced capacity, after they have drawn their pensions.”

There are some who fear the future is not quite so bright for the annuity space though, including Mike Morrison, head of platform technical at AJ Bell, who suggests the “natural forces of supply and demand [will] start eroding it”.

My bigger concern is not so much for today’s retirees, but I am worried for people looking to retire in 20 years’ time, when most retirees will only have a defined contribution pension.Natanje Holt

He continues: “Many providers have pulled out of the open market and most recently Prudential pulled out of the market altogether, probably because the demand has fallen away so quickly.

“Lots of surveys confirm that people still want a guaranteed income for life. A good pension freedoms market needs a good annuity market to allow the full spectrum of income opportunity.”

Like many, he believes the opportunity lies in using a blended approach in retirement, which he explains means “using part annuity to buy the minimum income and income drawdown for a flexible component… possibly moving to a full annuity as people get older”.

Future retirees

This may not make up for the fact the annuity market in the UK is now worth £4bn, down from £11bn before the pension freedoms.

The number of providers who have pulled out of offering annuity products is a worry for Natanje Holt, retirement expert at Bravura Solutions.

“That means people shopping around have less choice. This is an issue, but difficult to see what the remedy might be,” she admits.

“My bigger concern is not so much for today’s retirees, but I am worried for people looking to retire in 20 years’ time, when most retirees will only have a defined contribution pension and not the luxury and certainty of a defined benefit income that so many people are still benefiting from today.”

Ms Holt notes: “At that point, the majority of people will need to make their income last for decades and to have some element of certainty will make that process a little easier.

"I worry at that point there might not be much of an annuity market left and the expertise and products that we had only a couple of years ago would have been forgotten.”

eleanor.duncan@ft.com