In a report published yesterday (13 December) the firm predicted investor demand for annuities could increase dramatically within the next 10 years after remaining subdued in the short term.
The pension freedoms rules, implemented in 2015, gave savers with defined contribution pensions the option to withdraw their funds from age 55, subject to tax paid at their marginal rate rather than the 55 per cent charge previously in place.
Many people rushed to withdraw their cash, particularly those with small pots.
Figures released by HM Revenue & Customs in April showed 393,000 people had taken out £6.45bn from their pension pots in the 2016 to 2017 tax year - 48 per cent more than in the year before when it was £4.35bn.
However, there was an indication the rate of increase in the amount of cash being taken from pensions had slowed down.
In the first quarter of 2017 a total of £1.59bn was taken, compared with only marginally less (£1.56bn) in the quarter preceding it.
The tax take from pension freedoms was estimated by the Office for Budget Responsibility (OBR) in March to amount to £1.6bn in 2017-18, £1.1bn in 2016-17 and £1.5bn in 2015-16
But this was revised down £500m in November reflecting “individuals spreading their withdrawals over a shorter period than we had previously assumed,” the OBR said.
The number of annuity providers is estimated to have halved since the freedom reforms, which effectively eliminated the need for those with small pots to buy the guaranteed product.
But Hargreaves pointed out that while currently a mere 12 per cent of people buy an annuity, 43 per cent of people approaching retirement envisage buying one.
Hargreaves based its report on its own data as well as Censuswide survey data that polled 1,001 55-65 year olds with defined contribution pensions which had not yet arranged a retirement income.
Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “We anticipate demand for annuities will pick up again, in fact, it is more a matter of when rather than if.
“Our best estimate is we could see significant growth in the market around eight to 10 years from now as investors’ demand increases in response to their changing circumstances.”
The graph shows the attitudes of would be annuity investors
The firm pointed out pension freedoms had coincided with the alignment of low interest rates and the retirement of the baby boomer generation, which was due to change.
As that generation gets a diminishing appetite for investment risk they will simultaneously be eligible for increasing rates due to their advancing age and likely decline in health, it said.
But investors are not willing to buy at any price, Hargreaves found.
Almost half of those interested in buying an annuity would do so providing they could obtain a rate of income of 6.5 per cent - in other words a pay out of £6,500 a year for every £100,000 invested.
However 40 per cent would only buy an annuity if the available rate was 8 per cent or more, according to Hargreaves.
Annuity rates crashed after the Brexit vote in June last year but have been on a steady rise since then, amounting to a total upswing of about 19 per cent since September 2016, the firm’s data showed.
Back then a £100,000 pension could buy a non-increasing annual income of £4,495. Now it buys an income of £5,349, it pointed out.
Mr Long said: “Many people will be well served by electing to buy an annuity to cover the retirement spending essentials, in combination with income drawdown to provide flexible access to cash.
But he warned if the market continued to shrink retirees could find their secure income options limited in the future.
Mr Long said: “The government and the regulator both have a significant role to play in ensuring that secure income continues to be available to pension savers in the longer term.
“With new rules coming in next year , 2018 looks set to be a pivotal time for the future of the annuity market.”
The regulator is introducing new rules which will see annuity providers forced to inform their customers how much they could gain from shopping around and switching provider before they purchase an annuity, after it found people were not shopping around for the best deals.
Chris Knight, managing director of Legal & General’s retirement division, told FT Adviser earlier this month he believed annuities would make a come back.
“About 78 per cent of annuities set up in 1997 are still receiving an income. It works as a product,” he said.
He also suggested people would turn to the products later in life or use it as a supplementary income.
carmen.reichman@ft.com
