The Pensions Freedom legislation of 2015 came close to making annuities obsolete.
Sales plummeted and now account for just ten per cent of total market share, according to the Pensions Policy Institute (PPI).
The days when annuities dominated, with retirees required to take one out, are surely long gone never to return. However, with rising interest rates, financial turbulence and the continued decline of defined benefit – known as final salary schemes – could they be set for a comeback of sorts?
Certainly, more people are considering this option.
Annuities fell out of favour because drawdown meant the saver was in control, and able to hand their pot, or part of their pot, down to the next generation. Once purchased, annuities can’t be unwound, so people were concerned about locking into poor rates. However, with drawdown, your money remains invested and subject to the vagaries of the stock market. Hence, those who prefer certainty, wanting a guaranteed income for life, are looking anew at the merits of annuities.
Annuity providers buy government bonds to generate returns. Low interest rates push these returns down; the rise in interest rates we see today are edging annuity rates up. In the aftermath of the Brexit vote in 2016, someone with £100,000 could only get an income of £4,495 per year. Now the figure is hovering around the £6,000 mark.
Claire Altman, managing director of individual retirement at Standard Life, told FT Adviser: “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.
“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.”
A recent PPI briefing note showed that the average pot size used for purchasing an annuity had risen to £71,000 from £37,000 in 2015, while the number of annuities purchased at the age of 75 or over had doubled in percentage terms in the past five years.
Mark Ormston, director of propositions at Retirement Line, said this suggested people may appreciate the value of guaranteed income more as they age. “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.
“Annuity rates improve with age. At present, a 65-year-old can expect an annuity rate of around six per cent, whereas, a 75-year-old can expect an annuity rate closer to eight per cent.”
Beware, though, there are many types of annuity.
For example, the web site Unbiased states: “An annuity that pays you more money due to health and/or lifestyle factors is called an enhanced annuity. Qualifying conditions include cancer, high blood pressure, heart disease, diabetes and a long list of others. A standard annuity will stop paying out as soon as you die. However, you can select a joint-life annuity, which means it covers both you and one other person (usually your spouse). You can opt for an increasing annuity (sometimes called an ‘escalating annuity’) that pays out a higher income each year. This means that if inflation rises, your buying power won’t be reduced (or won’t be reduced so badly).”
Always shop around before buying an annuity – it is an irreversible decision.