The start of a recovery in the UK annuity market suggests that consumers in today’s post-pension freedoms world still value the benefits of a guaranteed income for life.
If anything, the increasing number of people retiring with defined contribution (DC) pensions, combined with a potential uplift in annuity rates, is likely to drive even greater demand for annuities over the coming years.
Annuities will not be the right choice for every customer, but they are nonetheless important products that should form part of every adviser’s retirement toolkit.
Green shoots of recovery
It is a well-known fact that the annuity market has suffered greatly since former Chancellor George Osborne announced in March 2014 that “no one will have to buy an annuity”.
In the last quarter of 2016, annuity sales fell to their lowest level this century, with just 17,000 contracts put in place, according to figures from the FCA. This is compared with sales of 89,000 annuity contracts in the second quarter of 2013 – a decline of 81 per cent.
Yet it is widely thought that the bottom of the market has now been reached, and we are starting to see the green shoots of recovery.
A note by analysts at RBC Capital Markets last year estimated that annuity sales will grow by 5 per cent annually, as greater numbers of people retire with DC pension pots. The ABI, meanwhile, has predicted there will be a steady increase in annual annuity sales into the 2020s.
Although much of this growth can be attributed to consolidation in the annuity market, it is another positive sign of the market’s recovery.
Improving gilt yields, higher interest rates, growing DC pots, potential equity market volatility and an ageing population all point towards an expanding annuity market.
It’s worth noting that people aged 65 and over will make up nearly 20 per cent of the UK population by 2024.
Far fewer retirees will have a defined benefit (DB) pension than was the case in the past, yet many will still be seeking the security of a guaranteed income.
The latest figures suggest 85 per cent of active scheme members in the UK are in DC schemes.
At the same time, auto-enrolment is creating a new era of pension savers who will need advice about their retirement income options.
There was a 33 per cent increase in occupational scheme membership between 2010 and 2015, and it’s likely that many of these members will have substantial DC savings when they retire.
Annuities could play an important role in many of these potential clients’ retirement income plans.
The value of annuities
The value that annuities offer has been somewhat overshadowed by the drop in annuity rates and the focus on flexible income drawdown. In the past 10 years annuity rates have fallen by about 50 per cent, in line with a drop in long-term interest rates and improving life expectancy.