AnnuityDec 30 2022

Annuities are back after being dismissed for too long

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Annuities are back after being dismissed for too long
Stephen Lowe, group communications director, Just Group
BySonia Rach

Pension annuities have once again become a topic of discussion, according to Stephen Lowe, group communications director, Just Group.

Lowe explained that annuities are once again being considered after "being dismissed by many for so long in the post ‘freedom and choice’ wilderness".

He said: “Partly due to rising interest rates, improving annuity rates have outstripped the falls in most pension funds, giving annuity buyers more income.

"But also because the classic drawdown solution – the 60:40 equity-bond portfolio – has had a shocking year with both components losing value.”

Lowe said “once in a hundred year” events seem to have become more like “once in a hundred days”, prompting questions about whether traditional thinking remains fit for purpose for the growing numbers of ‘middle Britain’ drawdown investors.

The binary choice presented by the annuity versus drawdown debate is "fundamentally flawed" – not only can individuals hold both, but they can also have one (the annuity) within the other (the drawdown plan), he explained.

“Replacing some or all of the bonds in the self-invested personal pension (Sipp) drawdown portfolio, with an alternative fixed income security (secure income) can create a more sustainable plan - whether that be to deliver more sustainable income or a higher portfolio value.

“2023 is set to see growing interest in these kinds of innovative solutions to the problems of ensuring drawdown portfolios remain robust in the face of economic turmoil.”

A surge in interest

Looking ahead, Lowe argued that 2023 is set to see record numbers accessing pensions for the first time and taking this complex financial step on their own without any professional advice or even a ‘sense check’ from guidance service Pension Wise.

“Another front is being opened up in the form of the Financial Conduct Authority’s holistic review on advice and new proposals for a simplified advice regime, cutting the costs and difficulties of providing advice to the mass market,” he said. 

“It is now up to us to make our voices heard and views known on how to make it work.”

In the meantime, he said Pension Wise should be prioritised but currently attracts numbers that are far too low. 

“There’s a growing clamour for trials of ‘auto-enrolment’ into guidance, including from MPs on the Work and Pensions Select committee,” he said.

In addition, employees have long seen their employers as a trusted source of financial information and services such as pensions.

“The aftermath of the pandemic and cost of living crisis is accelerating the need for employers to become more actively involved in promoting financial fitness among staff,” he added.