Annuities still have a role to play

Tapper also believes that people are reasonably relaxed about the risk of stock-market volatility in the first place, as he adds: “Most people can live with some risk to income in retirement – after all, we’ve done so throughout our earning life.

"For most people, the majority of income they get in retirement will be from the state pension, which is guaranteed (though the formula for increases is not). For both reasons, most people can live with an element of risk to income from private pensions – whether personal or occupational.”

And analysis by finance product data provider, Moneyfacts, published at the end of January, could also have an impact on their thinking: “Retirees considering an annuity would be disappointed to see another fall in the average annual income for the third year in a row, so it would be understandable for them to favour pension drawdown instead,” says Rachel Springall, a finance expert at the company: “Since pension freedoms were introduced in 2015, annuity income has fallen for five out of the six years. Growth has not been seen across the market for a one full year since 2017, which was just 1 per cent”.

While she anticipates the potential for more interest in annuities later in the year, there has been no spike in demand to date, reports Fiona Tait, technical director at Intelligent Pensions: “We are not seeing any increased demand for annuities at this time; in fact, clients are still somewhat resistant to the concept.

"We have been for some time advocates of gradual annuitisation for the majority of clients rather than a one-off purchase and have been having conversations about securing more of their basic income, but the take-up is still very low.”

“I do think this might change over the course of 2021 as the impact of lower investment assumptions starts to be reflected in our cash-flow models, but I can’t see many clients, if any, opting for full annuitisation.”

Annuities still important

However, despite lower levels of enthusiasm for annuities at the moment, their importance should not be overlooked, as Tait emphasises: “It is important for clients to have some certainty that they can cover their essential expenditure at all times.

Many clients are able to secure a sufficient level of income through the state pension and/or other investments but for those who can’t, annuitisation with at least some of their pension fund provides insurance against not being able to pay the bills.

“We’ve found that thinking of annuities as an insurance policy rather than an investment is quite helpful, especially as it also gives the client more scope to invest for growth with the remainder of their pension fund.”

Jonathan Cooper, head of paraplanning at Drewberry agrees that annuities remain important: “Annuities still have a role in the provision of retirement income.

"If you have a defined contribution pension, they're the only option retirees have if they want a guaranteed, lifelong income from their pension pot. For many people, this is still incredibly important — no one wants to think about running out of money in their old age.”

He adds: “Clients can combine annuities with drawdown and tax-efficient drawing from other, non-pension assets. This can help make use of all their available reliefs and allowances. Of course, all this depends on their personal circumstances.”

Down but not out

It would seem, therefore that reports of the death of the annuity have been greatly exaggerated, as Alistair McQueen, head of savings and investment at Aviva observes: “With the introduction of the pension freedoms in 2015 came predictions of “the death of the annuity”. This has not happened.

“The guarantee associated with the annuity continues to carry great attraction to many retirees. Increasingly, it is being used to provide a foundation income through retirement, together with the state pension.

"The more flexible drawdown is being used to support changing income needs, on top of this foundation. Others are seeking to use the annuity later in retirement, when income needs are more set. The ability to flex the use of the annuity is a benefit of the pension freedoms.”

Fiona Nicolson is a freelance journalist