By Fiona Tait, Technical Director, Intelligent Pensions
Is it because the climate has changed once again or is it possible that they never really went away?
Analysis of the FCA’s Retirement Income Data shows that there has been no mass return to annuity purchase since 2015, there has however been a slight increase since 2018 which has restored them to the levels seen immediately following pension freedoms.
Moreover, the increase has been driven primarily by those in the 55-64 age group, suggesting that while annuities are certainly not the dominant animal, they are still the right solution for the right person.
This should surprise no one. In most cases, the right person is not usually a 55-year-old accessing their pension for the first time to pay off debts or build a conservatory, or a scheme member reaching normal retirement age and facing the prospect of up to 30 years in retirement. Risk-averse clients whose predicted spending pattern is fully covered by the annuity income available to them on the open market in their 50s are vanishingly rare. It does not mean lifetime annuities are dead, it just means they don’t tend to suit younger retirees.
The reasons for this are obvious. Not only are annuity providers operating in a sustained period of extremely low interest rates, but longevity continues to increase and neither condition is likely to change any time soon.
The slight increase in annuity purchases is not therefore down to a change in the markets but to the equally predictable fact that retirees continue to age. Some of our current drawdown clients have been taking flexible income payments for 10-15 years and their risk profile may have changed. An increasing preference for safety is a well-known human trait as people age and yesterday’s growth investor may well be tomorrow’s annuity purchaser. In addition, spending patterns tend to show increasing consistency as people become less active and discretionary items such as holidays become less frequent. Then there is also the indisputable fact that the annuity rate available at 70+ is naturally better than the one available to someone in their 50s, and it may be further enhanced as their overall health is impacted by one or more medical conditions. We still find some resistance to the idea of the reviled annuity, thanks mostly to Mr Osborne’s comments, but there is no doubt that a secure lifetime income becomes a more attractive proposition to people who no longer have the same appetite or capacity to actively manage their finances.
Another trend that might have been predicted was the use of hybrid annuity products. Given the generally poor rates available to younger retirees it can be good policy to secure income to cover essential spending and rely on more flexible options to cover non-essential and lifestyle spending. This strategy not only provides peace of mind over basic living costs but provides the potential for investment growth on any remaining pension funds. This trend has not been significant so far. One reason is that the guarantees required remain expensive in a low-interest rate environment, which results in higher charges as well as more complicated products. Another is the aforementioned consumer resistance to annuities of any sort but perhaps the major reason is that there is simply a low demand for hybrid products. Product providers are likely to feel that the cost of development is prohibitive in the context of likely returns, particularly when it is possible for consumers to set up their own arrangement using a bespoke combination of separate drawdown and annuity products.
There are some interesting developments in this field, including the use of trustee investment plans to create more income flexibility and facilitate tax planning. Once again though it is likely that this will be more suitable for those who are fully retired and not simply accessing lump sums.
Taking all of these factors into account, there is no doubt that annuities still have a significant part to play in a long-term retirement plan. They will not however return to a position of being the primary option when people start to take money from their pension. De-risking will still be relevant, but at older ages than before pension freedoms became available.
|
