By Andrew Tully
- 18th April 2016
It would be fair to say that annuities have an image problem. When George Osborne uttered the words “Let me be clear. No one ever needs to buy an annuity again,” many commentators thought it would signal the beginning of the end for a product which can trace its origins back for centuries.
However, the market has proved incredibly resilient, with a raft of new developments introduced since April 2015. This is supported by the latest numbers from both the Association of British Insurers (ABI) and the Financial Conduct Authority (FCA), which show that sales actually increased in the latter part of 2015*.
Are we witnessing the start of one of the greatest comebacks of all time or is this just a blip? Well, funnily enough, the reasons why people save for retirement and what they look for from those savings did not suddenly change overnight following Mr Osborne’s speech – in fact, quite the opposite. The amount of airtime and column inches devoted to the pension changes, combined with the offer of help through Pension Wise, has meant people are, hopefully, clearer about what they can now do with their pensions. This includes the option of securing a guaranteed income for life.
In fact, when people are asked about what they want from retirement income products, their views are remarkably consistent. They tell us that they value certainty and flexibility in pretty much equal measure. When pushed, they rank certainty above all else.
When advisers present the options to clients with what you could consider a reasonable level of savings (say, £50,000 to £150,000), most people appear to want to guarantee an income that will keep paying the bills. Only when the client has secured that income – whether through defined benefits, the state pension, annuity income or a combination of all three – do they begin to consider how they can use any remaining funds more flexibly.
Moving with the times
Product providers have not stood still. They quickly addressed one of the key objections to annuities: that the insurance company keeps the money if the customer dies early.
Since April 2015, providers have been able to offer longer guarantees, with some companies moving to 30 years (previously the maximum permissible was 10 years), as well as up to 100 per cent value protection (not used in the past due to a 55 per cent tax charge, which is now paid at the customer’s marginal tax rate). Note the tax treatment at death is different before and after age 75, with no tax being levied before age 75.
What this means in practice is a guaranteed money-back return on the initial capital, and quite possibly a healthy investment return as well. More than one in seven of our customers is using these longer guarantees, which is quite a step change in less than a year. The difference in annuity rate offered can often be relatively small, and therefore the cost of the guarantee can be a very effective way of looking after dependants and family, or simply passing on wealth at death.
Flex and adapt
Towards the end of last year, we began to see innovations from the product specialists, combining annuities and drawdown into 'retirement accounts', written under drawdown rules. The annuity provides lifetime income, while the drawdown pot can be used as an opportunity to invest or as a rainy-day fund or perhaps as a nest egg for family members.
As the annuity is an integrated component of the account, the income can be switched off (for example, if the customer returns to work and wants to manage their tax liability), with the income redirected into the drawdown pot. As the income never leaves the pension wrapper, tax is not liable. This demonstrates the thinking behind the product design, being able to flex and adapt as customer needs change through retirement.
Annuity sales have seen their first quarter-on-quarter increase for the past three years. Could this be the early sign of an annuity fightback? We will not know for some time but what the stats do show is the equal value placed on both certainty and flexibility. This tells me that the direction of travel for the companies which have invested in product innovation is the right one.
Annuities in one guise or another will continue to form the foundation of retirement planning for the majority of people. We just need to find a way of improving their image.