By Fiona Tait, Technical Director, Intelligent Pensions
Of course, higher rates should not be the only reason to purchase an annuity, but it does help. Earlier cohorts of drawdown clients are now reaching an age where their income needs have perhaps stabilised and/or their risk appetite has diminished.
Many advisers, including ourselves, have not been actively involved in the annuity market for many years and this new interest has meant getting back up to speed with what’s available on the market. What we have found is a lot more choice, and a lot more things for clients to think about before they take the irrevocable decision to commit their pension fund to a fixed income plan.
What’s changed
Annuities, or pension annuities anyway, used to be for life. The primary purpose was to replace salary payments and provide a secure source of income. The introduction of pension freedoms changed this forever. People buy annuities, if they buy them at all, later, and for different purposes. This is especially true for those lucky enough to have more than one pension plan to play with.
Annuities as underpins have become more popular and allow clients to secure essential income needs while leaving the remainder of their fund available for growth and to provide a potential inheritance. Layering these annuities over time also means that the client can avoid committing their fund to a single annuity rate or annuity shape.
The rise of short-term income plans (STIPs) mean that annuities are also available as bridging or cash-out plans. Technically of course these are not actually annuities, being written under drawdown rules, but they do the job of providing a guaranteed level of income albeit only for a fixed period. Clients who are looking to retire before their main workplace pension kicks in, and/or ahead of the receding State Pension age may need an income to plug the gap. Others may have been drawing income from one or more of their pensions for several years leaving a small fund value which no longer supports the cost of ongoing advice or investment management.
Lastly there is the option of annuity-as-investment, where the annuity sits within a SIPP and income is therefore paid into the pension fund leaving the client with the option of how much to withdraw without triggering an unnecessary tax bill.
What hasn’t
Annuity choices still have to be made at outset. It is possible to build in increases and links to investment however this choice, like all the others, is reflected in the initial income. With longer and longer periods spent in retirement it is impossible to predict whether a spouse’s pension will pay off or be lost, or if the client will live long enough to reach the break-even point with an escalating annuity. The result of this is that, other than in the bridging scenario, buying annuities later in life is still likely to be the norm.
Buying an annuity when the client is older also makes it more likely that they will be able to take advantage of an enhanced annuity rate. Underwriting has become more sophisticated, and clients are often surprised that their condition, or more likely a combination of conditions, could result in a significant uplift. In some cases, the resulting income may even surpass the level available from the client’s defined benefits scheme, particularly if they don’t need the spouse’s pension and can opt for a single life rate.
Consumer Duty
Consumer Duty affects every aspect of advice, and it is relevant to annuities in that it reinforces the need to ensure that a client’s current plan remains suitable. Drawdown plans must be reviewed at least annually, and advisers should always check if an annuity might be more suitable. Until recently many of our clients would resist such a course but the Consumer Duty is clear – we are not order-takers and we must show the client what is most suitable for them and do our utmost to explain why this is the case.
On the face of it, annuities are simple products, but choosing the right annuity, and at the right time, is far from easy. That is why the 19% figure is so concerning.
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