The spike in rates over the past year saw the popularity of annuities rebound and Nick Flynn, retirement income director at Canada Life, is expecting this trend to continue into 2024 due to the macroeconomic environment.
Annuities had a tough few years as rates hit a low and savers opted for greater flexibility after the introduction of pension freedoms saw the rise of drawdown.
But Flynn said 2023 will be remembered as “the comeback year for the humble annuity”.
Flynn said: “Annuities are now being used as an asset in their own right, alongside drawdown, ensuring flexibility and certainty in client’ retirement plans.”
He said he was expecting this popularity continue into next year as the FCA carries out its review into retirement income advice.
“Expect a focus from the regulator on the evidence behind the advice provided, as well as looking at how consumer duty is being implemented,” Flynn said.
“This is set against an interesting backdrop of higher interest rates, the ongoing cost of living challenges and relatively benign investment conditions when the FCA were speaking to firms.”
Annuities were previously seen as inflexible and expensive, he explained, but following a record rise in rates, “annuities are now firmly back on the financial planning agenda”.
While annuities have become popular again due to the shift in gilt yields, demand has also come from savers looking for income certainty in times of economic uncertainty.
Source: Canada Life annuity rates over time, as at 27/11/2023
Governor of the Bank of England, Andrew Bailey, has warned of stubborn inflation and stressed the Bank of England would keep interest rates high for an extended period of time.
“This combined with gloomy forecasts for the UK economy over the short to medium term, could mean that consumers will seek income security when choosing retirement options,” said Flynn.
“We certainly see no signs of the demand for annuities waning if rates stay where they are today.”
Research from Canada Life earlier this year found there could be a difference of £13,000 between the best and worst annuity so it was important for clients to shop around.
Its analysis worked out over a typical 20-year period, the difference between the best and worst annuity in the open market could pay an extra £13,240 in income (£662 a year). This is based on a pension of £150,000.
In reality, the difference between the best and worst deals in the market could be even bigger, Canada Life says, as many providers don’t openly publish their annuity rates.
amy.austin@ft.com
