Don't let annuities get written out of the picture
16 Nov 2017
Pension freedom may have given people more control over their retirement income but, warns Chris Knight, a lack of awareness about the various income options available means thousands of people are defaulting to drawdown.
Some might conclude it is not looking too good for the annuities market at the moment. The recent Financial Conduct Authority (FCA) bulletin, for example, reports the number of annuity sales has fallen to its lowest level since then-Chancellor George Osborne introduced pension freedoms two and a half years ago.
At the same time, continued uncertainty in the market is being fuelled by cautionary headlines such as "Britain's annuity market is facing extinction". And yet a closer look at how annuities are performing reveals things are nowhere near as bad as the doomsayers claim.
There has always been a case for seeing the introduction of pension freedom in 2015 as welcome news, as it provides consumers with greater flexibility when accessing their pension pots and has brought about a shift in the way people access their pension pots.
Whereas before, 90% of pension pots were used to purchase an annuity, those aged 55 and over are now able to take their pension savings as cash in one or more withdrawals, to leave some invested, to purchase an annuity or do a combination of the three. According to the FCA's Retirement Outcomes Review, for those using ‘Freedom and Choice' to access their pension who have not received advice, over half of the pots were entirely cashed in.
The announcement of pension freedoms certainly led to a shakeup of the annuities market, including a short-term fall in annuity sales and a number of providers exiting the market. But while the FCA's latest figures have shown a fall in the number of annuities purchased over this period, the number of people accessing their pension pot for the first time has also decreased. It means the proportion of people taking out an annuity has actually remained at a similar level.
The decline in the number of annuities sold, reported by the FCA, also contrasts sharply with Legal & General's individual annuity sales figures, which in the first half of 2017 were up 89% against the same period in 2016. And while we have seen a fall in the number of annuities providers, in some cases these movements have been the result of mergers, which have actually served to strengthen the quality of existing competition in the market.
For many people, annuities remain an important source of stable, guaranteed retirement income. Negative perceptions about these products do still persist, so the market has its work cut out to highlight to both consumers and the media the valuable role annuities can play as a source of later-life income.
One way in which the industry can do this is by showcasing the value of annuities as an insurance against longevity and to tackle any lingering misconceptions. Many people, for example, have a life insurance policy to guard against the potential financial impact of their death on their loved ones, so why not arrange for an annuity that can guarantee financial support throughout retirement, whether they live until 70, 80 or longer?
By using just part of their pension pot to buy an annuity, consumers can secure a guaranteed income for the rest of their life, or even the life of their spouse, giving them the peace of mind that, at the very least, some of their day-to-day outgoings are covered.
Record low interest rates have seen annuity returns fall in some cases but, again to use Legal & General as an example, current annuity rates actually stand 14% higher than the same time last year. And what about those who are concerned about the impact of an early death on their pension pot for their family? First, there are various products that allow for income to be passed to a spouse - but the truth is that 78% of our customers who took out an annuity in 1997 are still drawing their annuity income, 20 years later.
To get this message across, the crucial step is to ensure individuals receive professional advice to guide them before, at and during retirement. Pension freedom may have given people more control over how they manage their retirement income but a lack of awareness about the various income options for later life means thousands of people are defaulting to drawdown.
Many people will give little or no consideration to how they take their income in later life - they might not even speak to an adviser about retirement income until they stop working or reach 55, when they can access their pension pots. FCA research suggests the majority of those accessing their pots are not using them to generate a regular income.
Whether it is highlighting the benefits of a guaranteed income, tackling the various media misconceptions or simply speaking to consumers at an earlier stage - perhaps even aged 50 - about how they plan to take their retirement income, advice remains central to helping consumers make better decisions for a more satisfactory retirement.
The annuities market might have faced challenges in recent times but there is still a place for these products within a holistic retirement income plan. As an industry, we need to get across the message this is a growing market, not a declining one - but that will ultimately require action from providers and the advice of intermediaries to help consumers realise the benefits of a guaranteed income for later life.
This article was originally featured in Professional Advisor