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End of the road: Will the annuity market survive pension freedoms?

The future of the annuity market has been hanging in the balance ever since Chancellor George Osborne’s shock announcements on pension reforms in last year’s Budget.

Some felt it was the final nail in the coffin for a market that had long been criticised for its opaque pricing and poor value and the share prices of annuity providers plummeted in the immediate aftermath. Others, meanwhile, argued it was simply a knee-jerk reaction and there would always be a place for annuities as a means of providing a secure income for life.

So, 10 months on from the thunderbolt is it any clearer whether annuities will take their place in the new regime or be a casualty of the changes?

The problems with annuities

Low interest rates and increased life expectancy took their toll on standard annuity rates in recent years. With only one shot at buying an annuity, people can often become locked into low rates. Providers have also been criticised for not doing enough to ensure customers shop around for the best rates under the open market option. Some people default into low rates from their existing provider, unaware they could get better rates from enhanced and impaired life annuities if health conditions meant their life expectancy was shorter.

Last month the FCA published its thematic review into annuities sales practices. It found 60 per cent of consumers were not switching providers when they bought an annuity despite the fact around 80 per cent of those consumers could get a higher income on the open market. For enhanced annuities the FCA estimated the proportion that could get a better deal on the open market as 91 per cent.

Terminal decline?

“If you think annuities are bad value now, it’s only going to get worse. I am struggling to see how it’s going to get better,” warns Scottish Friendly sales and marketing director Neil Lovatt. 

For Lovatt, the pension reforms mean annuities will no longer be the default option – taking the funds as cash will instead.

“Who is going to buy an annuity? If you smoke, drink and are overweight probably not you. The last thing you’d want to do is put £100,000 in an annuity for an income for life if you are only going to last the next five years,” he says.

“If you lead a healthy lifestyle and are likely to live for the next 30 years it starts to look more interesting but actuaries will know that so they will start pricing on the assumption the only people buying it are healthy. Rates will stretch out further and you will lose that cross-subsidy, the pooling and shading of the risk of different life expectancies.”

Pension adviser Portal Financial managing director Jamie Smith-Thompson says annuities are losing out not because of the new rules and increased flexibility but because people who may have defaulted into them are now aware of their options.

“People are seeing they have more options and are wondering whether something else might be more suitable,” he says.

A new purpose?

Drawing on data from the Association of British Insurers, Altus Consulting’s recent industry white paper, The High Cost of Freedom: Retirement in 2020, highlights a downward trend for annuity sales of around 6 per cent a year since 2010. While the Budget bombshell has no doubt accelerated that decline Altus senior consultant and author of the white paper Jon Dean says this does not mark the end of the annuity market.

“What we’ve seen in New Zealand, which is a comparable market to our own, is the death of annuities. But I don’t think I’d necessarily see that happening here,” he says.

“People don’t want annuities but they do want a secure income for life. There are sometimes misunderstandings of what an annuity is or they are perceived as bad value for money but they will not die out completely.”

Dean predicts there will be fewer annuity providers by 2020 and those that remain will sell more deferred and/or later life immediate annuities. Many in the industry are also predicting people will take a blended approach, using part of their pension pot to buy an annuity and the putting the rest in drawdown.

Partnership head of product development Mark Stopard believes more annuities will be underwritten when they are something people choose to buy – and he thinks a sizeable number of people will do so.

He believes enhanced annuities in particular will be viewed as good value for money and are well placed to provide for variable outcomes among people with health problems.

“For example, if you have cancer in remission any number of things might happen. As two extremes, it could come back aggressively and you could die in two years or it may never reappear and you could live a healthy life,” he says.

“That’s hard to plan for. Do you plan for death in two years or fin 25, where you could have underspent your income?”

Stopard thinks it is better for people in this type of situation to get a spread of income against their lifespan via an underwritten annuity.

But Dean believes people with reduced life expectancy are likely to take an “unfettered drawdown approach” under the new rules, with some probability of people leaving unused funds to their estate. In the Altus white paper Dean says: “While enhanced annuities and equity release are unlikely to die out altogether, more flexible alternatives would be popular with customers.”

New opportunities 

Annuity specialists have huge holes to fill in their new business propositions and need to diversify fast if take-up never recovers to former levels, says Dean. He thinks impaired and enhanced annuity specialists could use their underwriting expertise to generate bulk annuity new business, at least in the short term.

“This same specialist knowledge may well present them with additional opportunities, either to sell underwriting services to the wider market, to expand overseas where annuities are being looked at afresh, or to innovate new longevity insurance products,” he says in the white paper. 

Dean points out that Australia and the US are encouraging take-up of lifetime and later life annuities. “Offering up the UK’s spare capacity and long-standing experience looks like a natural fit,” he says.

The biggest challenges doing this will be understanding the local regulatory landscape and building brand awareness but smart partnering with established brands could offer a way in to these markets, he adds.

Aegon Ireland marketing director Duncan Robertson also draws parallels between the UK and elsewhere.

He says: “Back in 1999 the Minister for Finance for Ireland announced he was abolishing compulsory annuities. It was similar to the UK in that there was a lot of uncertainty as to what that would mean for products and the tax system. There was a worry people would spend their money on Ferraris. But that didn’t happen; people didn’t waste their money. They used the freedom to put their money in income drawdown style products to pass it on to future generations in a tax efficient way and used other sources of income where possible.”


Aegon’s Retirement Readiness survey, published at the end of last year, found 70 per cent of people want a guaranteed income and 30 per cent of those wanted a lump sum as well. Robertson thinks people in the UK will want products that combine a guaranteed income with flexibility.

“There are still people who will go down the annuity route – some will want such a high level of guaranteed income that annuities will be the best solution. But that will reduce significantly and the larger part of the market will want guarantees and flexibility as well. Using the Irish example, annuities used to be 100 per cent of the market and now it’s 25 per cent, with 75 per cent going into more flexible solutions.”

Smith-Thompson sees conventional annuity providers looking at other options.

“It is a massive recovery mission for them. I think there will be more innovation and third-way products with underlying guarantees. But I have never liked fixed-life annuities as they seem to offer the same value as going into drawdown and investing in cash,” he says.

Adviser view


Alistair Cunningham, financial planning director, Wingate Financial Planning

There will definitely be demand for annuities. That demand will be reduced somewhat but the death of the annuity has been greatly overstated because for many people simplicity and low risk is key. We are no less likely to recommend them to someone than we were a year ago. One of the significant things is that as people get older annuities become better value. Someone in their nineties can get 20 to 30 per cent annuity rates. People won’t wait until they are 90 but I think we’ll see a situation where people between 65 and 75 who didn’t have a choice two years ago don’t annuitise. We treat drawdown as annuity deferral, where people who choose not to do it can kick the can down the road another year.

Adviser view

Eade-Nick-Annuity Bureau-2015

Nick Eade, proposition manager, The Annuity Bureau at JLT

Annuities will always have a place in the retirement space. We get a lot of enquiries from people saying they don’t want an annuity but they do want a guaranteed income for life. ’Annuity’ is a much-maligned term and the press has done a good job in convincing people they aren’t good value but for some people it is. If someone has no capacity for loss an annuity is right for them. A lot will depend on the rates available from providers and people are starting to look for different degrees of flexibility. I think the attractiveness of conventional annuities will depend on where people are in their retirement journey – if they want to take benefits early they might not look at annuities. A blend of solutions is likely to become popular.


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. I’m afraid that this headline is arrant nonsense. Of course annuities will survive.
    Consider this:

    1. All the current hysteria is based on the presumption that people have pots of less than £100k. These are not serious pensions anyway. This kind of problem could have been solved by changing the triviality rules.
    2. It seems also be assumed that the pension is the only asset. Nonsense. Many have significant investment in addition
    3. Third assumption – people in good health will retire at 60/65. Some might but many are the masters of their own destiny (business owners or the self-employed) and they in the main retire much later. (And with very sizeable pots).
    4. Last assumption – that people take single life annuities – therefore drawing down or taking the lot does not necessarily include the spouse.

    And then we have:
    A. An ever increasing significant proportion qualifies for enhanced or impaired life annuities.
    B. For a 65 year old and spouse near that age – a joint life 100% spouse’s annuity pays around 5%. Can anyone show me when any annuity actually paid 10 times base rate or (taking RPI) over 3 times inflation? Yes I know these change- but they always did.
    C. How many who take out the pot will reinvest? Is this a daft thing to do or not? If just left in the pension growth is free if CGT and ant liability to income tax. All these fund managers salivating at the prospect must be relying on the usual tremendous stupidity of the public.
    D. How many in draw down realise that if (say) they require an income of 6% of the value of the fund this means that (at the very least) they will have to have a fund performance of 7.5% just to stand still. If the fund depletes – what will their spouse be left with? (Yes for those who are single or in poor health drawdown may be an option). Bear in mind that in 2014 the UK market went BACKWARDS by 3%. So if 6% was taken this meant that the fund shrunk by at least 10.5%. Great result!

    I just hope that those encouraging clients down this route burnish their PI cover.

  2. Harry – I don’t disagree with C and D, but for point B, 5% is a pathetic return. For the average man and woman all they get is their own capital back. (Average 65-year-old woman’s life expectancy = 20.8 years.) Buy an annuity and the insurer will gradually hand you back your own money in tiny little dribs and drabs until you die, while pocketing any growth and the surplus fund if you die early. A Marxist couldn’t invent a better caricature of the financial industry.

    But, of course, you might live longer than the average. Yes, if you survive to your late 80s or 90s, you’ll finally get something out of the contract. Hopefully you’ll still be lucid enough to enjoy this little victory – more likely the only one able to enjoy the income will be the nursing home.

    As for A, I wonder if more people qualifying for enhanced annuities is really a mixed blessing. The attraction of the annuity is that the short-lived subsidise the long-lived, but when the short-lived are removed from the standard annuity pool because they either buy enhanced annuities or just take the money, the rates for everyone else will inevitably get even worse.

  3. Even quite sane and educated people believe buying property is the ultimate panacea. I have a few who intend to pull out their entire pots and buy property. Even though this involves paying tax on the amount above the 25% tax free limit.

  4. Sascha
    This is always a fascinating debate.
    We are in a different world. Interest rates are also lousy and will say low for some time to come. Cash flow is everything. Longevity seems to be on the increase. There’s a lot to be said for a secure no worry income as a cornerstone, which may also secure the wife’s income when you’re gone.

    As far as nursing homes are concerned many would prefer to be in the best most comfortable one rather than the sort of poorhouse generally on offer. Anyway there are far better alternatives. Full time care at home for example.

    As far as the pool is concerned I would hazard that this will be relatively short term. Who says interest rates will stay low for ever? Who will guarantee that equity returns (or capital growth) will be achieved. Australia is now backtracking on the idea. I also wonder why we can’t offer the sort of rates that Swiss Annuities can manage. There are so many facets. Annuities may be a poor deal (I personally don’t think so) but they are the least poor deal. The other options are worse.

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