The pension freedoms set to be introduced may be welcome news to those approaching retirement, but they're posing significant issues to annuity providers. In fact, sales of annuities are already dropping – and they're falling at a fast rate.
According to figures from Towers Watson, sales of enhanced annuities – those suitable for retirees with certain health or lifestyle issues that may signify reduced life expectancy, such as smoking or certain illnesses – fell by 65% in the final three months of 2014 compared with the same period in 2013, following four consecutive quarterly reductions.
Breaking it down further, the figures show that total premiums fell by 13% in the fourth quarter to £334.8m, following reductions of 36% in the third quarter of 2014, 29% in the second, and 12% in the first. Overall, annuity sales were down 44% over the year as a whole – sales of enhanced annuities for 2014 totalled £2.17bn, down from £3.85bn in 2013 – as the impact of the reforms began to truly take its toll.
"The reductions in annuity sales, particularly to those with reduced life expectancy, are an inevitable reaction to people anticipating greater freedom about how they use their defined contribution (DC) pension," said Jeremy Nurse, a director at Towers Watson. Many people are turning their back on annuities in the wake of the reforms, be it through uncertainty over what to do next, or the desire to take full advantage of the new-found freedoms.
However, it isn't just sales that are suffering. Annuity rates are falling, too, arguably as a direct consequence to reduced demand, and that means anyone who still wants the guarantee of an annuity could be left with a lower income as a result.
Moneyfacts' figures show that the average annual income from an enhanced annuity for a 65-year-old with a £50,000 pension pot fell by 2.9% during the last three months of 2014, resulting in an annual income of £3,250 per year (down from £3,349 in the previous three-month period). The cuts are even sharper when looking further back – since the Budget was announced in March 2014, the average income payable from an enhanced annuity has fallen by 6.8%, which could have a significant impact on the income a retiree gets for the rest of their life.
And, with gilt yields also falling – the returns of which typically generate the guaranteed income from an annuity – it's no wonder that annuities are paying the price. "The ability of providers to withstand the downward pressure on annuity rates being exerted by lower gilt yields has been curtailed by the reduced demand for annuities since the 2014 Budget, which shows no signs of abating," said Richard Eagling, head of pensions at Moneyfacts.
Demand has clearly suffered as a result of the pension reforms, but there are suggestions that stability could return to the market. In essence, this could be the new norm, albeit with lower sales volumes than have previously been witnessed, once people have grown comfortable with the new landscape and have a better understanding of how the freedoms may affect them.
Annuity providers are also rising to the challenge by designing 'flexible' annuity products that can adapt to the new environment, and of course, many people will still want the guarantee that annuities can offer. It isn't the end of annuities, as Jeremy Nurse adds: "Traditional annuity products, along with some of the more flexible annuity products already available, will undoubtedly continue to suit the risk and tax considerations of many retirees."
So, is it time to consider your options? Whether you're set on getting a guaranteed income or aren't yet sure what the other possibilities are, check out our annuity planner to consider your options.
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