Pensions provider LV said it has seen a significant increase in enquiries from advisers looking for fixed-term annuities for their clients in order to secure a basic income on the back of the ongoing coronavirus crisis.
According to the provider, application volumes have more than doubled over the last month compared with the monthly average seen over the previous three months, as stock market volatility, caused by Covid-19, frightened retirees.
In February LV received 41 applications with an annual premium equivalent of £287,000, but in March this increased by nearly threefold (173 per cent) to 112 applications with an annual premium equivalent of £979,000.
Clive Bolton, managing director of savings and retirement at LV, said this was due to many retirees seeking a level of certainty with their retirement income over a specific term, while they wait for the market to recover.
Mr Bolton said: “Fixed term annuities are a way for customers to receive a guaranteed level of income/maturity value but retain some flexibility.
“This makes them a useful option for those risk averse customers that are looking to secure a bedrock level of income to cover them during a period of extreme volatility; they might want to look at this for part of their funds and use the rest to provide growth, or they may just want the certainty over a specific term while they see what happens over the coming years recovery.”
A fixed-term annuity provides a regular retirement income for a number of years – often five or 10 – as well as a ‘maturity amount’ at the end of the specified period.
Savers can then use the maturity amount to invest in another retirement income product, such as another fixed-term annuity or a lifetime annuity, or they can take money out of their pension.
The LV fixed term annuity currently has a three-year minimum term.
According to LV, this product is particularly aimed at cautious retirees who are looking to ‘pause’ the big decisions and take a secure/guaranteed option because they are not comfortable with the risk of investing in stockmarket-based funds until the current market situation calms down.
Mr Bolton said: “The huge stock markets falls of the past weeks and the ongoing volatility that looks to be here for some time to come have worried many savers who are either approaching retirement, or drawing an income from their pension fund.
“Fixed term annuities are useful solutions to consider in helping customers who like certainty and need to make decisions about their retirement but who aren’t ready or able to make long-term commitments.
“Most people at this stage of their life look for certainty and security and the prospect of drawing an income from a fund that is falling in value will be deeply concerning.
“Although drawdown is hugely popular, savers in drawdown run the risk of running out of money in retirement. An alternative, which has become increasingly popular over the past few weeks, is a fixed term annuity.”
Annuity rates plummet
However, savers will not be getting the best deal on annuities at the moment as rates have fallen to record lows.
According to data from Moneyfacts, the average annual standard annuity income for an individual aged 65 (based on a single life £10,000 level without guarantee annuity) fell by 6 per cent in Q1 2020, leaving the average annuity income 1.7 per cent lower than its previous record low in October 2019.
The plunge in rates is due to a decline in gilt yields, which have also fallen as a result of coronavirus and current market uncertainty.
amy.austin@ft.com
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