The stockmarket took just under an hour to decide former chancellor George Osborne’s pension freedoms spelled doom for traditional annuities. The share prices of Just Retirement and Partnership – which, as enhanced annuity specialists, were severely exposed – plummeted in the wake of the announcement.
Traditional insurers were also hit, although these more diversified businesses have weathered the storm and shifted towards a model where the accumulation of assets, rather than insuring against longevity, is the core focus.
Unsurprisingly, the market was not wrong about the implications the reforms would have for sales of guaranteed income products. In the three months immediately after the freedoms launched in April 2015, just 12,418 annuities were sold. In the same period in 2013 that figure was 89,896.
Plunging annuity sales have inevitably seen insurers review their ongoing commitment to the open market. No fewer than seven providers have stopped selling annuities to external customers since the freedoms were announced: Reliance Mutual, Friends Life, Partnership, Prudential, Aegon, Standard Life and, just last week, LV=.
This matters because healthy competition benefits consumers. It forces providers to compete fiercely either through the rate they offer, their service or the sophistication of their underwriting processes.
In the wake of the Partnership/Just Retirement merger advisers voiced concerns about the implications the deal would have for savers. Both were notoriously competitive when it came to battling for advisers’ business.
But it is not just competition within product sets that matters. The retirement income market also needs healthy competition between products. For many, the choice between annuity and drawdown – guaranteed income versus flexibility – will be a tough one.
The loss of competition in the annuity market places regulated financial advice front and centre of the UK’s retirement planning landscape
A strong, well-functioning annuity market will keep drawdown providers’ collective feet to the fire, ensuring competitive pressure is applied across the market. An impotent annuity market, on the other hand, limits people’s retirement options.
Furthermore, many clients who prefer the control and tax planning benefits offered by drawdown might still want to secure some of their income by buying an annuity with a portion of their fund. It goes without saying these savers will want to get the biggest bang for their hard-earned pension bucks.
Ultimately, the market will work better for advisers and clients if both annuity and drawdown providers are competing hard to win their business, ensuring both value for money and choice.
Where advisers come in
The loss of competition in the annuity market, like so much of the fallout of the pension freedoms, places regulated financial advice front and centre of the UK’s retirement planning landscape.
Too few people shop around before locking into an annuity contract for the rest of their lives. The Government has, rightly, scrapped plans to allow people to trade-in existing annuity contracts, making it even more imperative advisers and clients scour this shrinking market in order to get the best deal possible.
If this lack of competition translates into poorer rates being offered, it is also likely more clients with a low tolerance for investment risk will be tempted to enter drawdown where before they might have wanted the security of a guaranteed income for life.
Shopping around in drawdown is important too, although it is very different to shopping around for an annuity. While annuitisation is a permanent, one-and-done decision, drawdown providers not doing their job properly can be dumped relatively easily by advisers and clients. It is these conditions that make competition in the drawdown market so ferocious.
Someone who keeps their money invested through drawdown needs to review their portfolio regularly, at least once a year, rather than simply at the point they reach “retirement”. This should encompass not only service and value for money, but also the sustainability of withdrawals and the suitability of portfolio choices.
The growing complexity of this retirement income picture makes advice more valuable than ever before. The pension freedoms have created a divided market – one part (annuities) where competition is on the wane and another (drawdown) where firms are fighting tooth and nail to earn the right to administer clients’ assets.
While drawdown customers will be well catered for in this environment, the decline of annuities spells trouble for retirement income choice.
Tom Selby is senior analyst at AJ Bell