I used to say that the annuity market was in the back water of financial services and nothing much happened to annuities. However that was far from the case in 2012, a year in when we saw annuity rates reach the lowest levels ever, the ending of gender specific pricing and new rules for drawdown income. In addition to this the industry is preparing for the new RDR rules and we already seen the increase in non-advised annuity firms.
In the last Retirement Strategy article of the year I thought it a good idea to reflect on the last year and look forward to 2013.
2012 will probably be remembered as the year when annuity rates reached the lowest levels ever as hopefully we will see a small rally in 2013. A combination of the lowest gilt yields since 1703 and the self-fulfilling prophecy of lower rates because of gender neutral pricing has meant that we end the year with annuity rates 8 % lower than at the beginning of the year. See comments about annuity trends.
As rates for healthy annuitants went down, the number of enhanced annuities arranged increased as the two giants of the enhanced annuity market, Just Retirement and Partnership battled it out for distribution. This market is bound to increase next year as more and more annuitants qualify for enhancements. How long will it be before all annuities are medical underwritten? How it is worth reminding advisers that although enhanced annuities do pay a higher income they don’t solve the problem of low annuity rates, they just make the best of a poor deal.
2012 may be the year that investment linked, fixed term annuities and unit linked guarantees finally gained mainstream recognition. Sales of Prudential’s and MGM’s with-profits increased and Met Life gained a bigger market share. It will be interesting to see what will happen to sales of drawdown in 2013 when the maximum income returns to 120% of GAD.
Although the new rules for RDR do not come into force until January 2013 it seems that some of the unintended consequences have already started to happen. RDR is supposed to ensure that clients are offered a transparent and fair charging system for the advice they receive and clients receive advice from highly respected professionals. However it seems to me that an unlevel playing field has been created because no advised sales can still be paid commission and the result will probably be an increase in no advice sales. I feel sorry for clients because they don’t know the difference between advice and no advice because it seems to be all about the rate.
I fear that the most damaging unintended consequence of RDR will be a reduction in the number of people getting advice about annuities. This matter a lot because clients may not the best outcomes without advice and there is a danger that many non-advised sales turn out to be advised sales in disguise.
Billy Burrows is director of The Retirement Academy