After a decline in annuity sales following the pension freedoms, the market seems to have levelled off with purchases accounting for around 10 per cent of total market share, according to the Pensions Policy Institute.
A PPI briefing note published yesterday (May 26) showed that the average pot size used for purchasing an annuity has risen to £71,000 from £37,000 in 2015.
But in recent years, more pots under £10,000 have been used to buy these products. These small pots accounted for 16 per cent of total annuity purchases in 2016-17, whereas in 2020-21 they were used to buy almost a quarter of all annuity purchases.
Claire Altman, managing director of individual retirement at Standard Life, part of the Phoenix Group, noted that this is an interesting time to look again at the role annuities can play.
“With [defined benefit] provision continuing to decline, stock market volatility on the rise, and people continuing to underestimate their own longevity, annuities can play a valuable role in providing income certainty,” she said.
“However, if this market is set to grow again it will need to address the misconceptions that many people hold about annuities and make a case for how they can be used in combination with drawdown, rather than as an alternative to it.”
Over 75s flock to annuities
The PPI’s briefing note said another trend is the number of annuities being purchased at the age of 75 or over has doubled in percentage terms in the past five years, according to Financial Conduct Authority data.
Mark Ormston, director of propositions at Retirement Line, said this suggests that people may appreciate the value of guaranteed income more as they age.
He added: “It will be interesting to see if this potential trend continues in future years, as it has been widely thought for some time that many people may turn to an annuity to provide secure guaranteed income in later life. So far, the data we have available to us since pension freedoms is seemingly supporting this view.
“There are many reasons why people may look to annuitise later in life, including the fact that annuity rates improve with age. At present, a 65-year-old can expect an annuity rate of around 6 per cent, whereas, a 75-year-old can expect an annuity rate closer to 8 per cent (providing 33 per cent higher yearly income than at age 65).”
Annuities can help with longevity risk
The PPI noted that annuities can also help with longevity risk, with the briefing note stating that “over the past 40 years, life expectancy at age 65 has increased by almost six years for men and five years for women”.
This means that retirees could benefit for longer from having a reliable income through annuities, but also means that those who withdraw large sums at retirement will be forced to make their pension pot last longer.
“If longevity improvements continue at a similar rate in future years, when I reach the age of 65 it may well have increased by 10 years or more in my lifetime alone,” said Ormston.