Annuities still have a future in the UK, despite the introduction of a number of reforms to the way that people can access their retirement funds, according to pensionís minister, Steve Webb.
Speaking about the potential impact that the pension reforms identified in this yearís budget by Chancellor George Osborne will have, Mr Webb sought to downplay recent comments that the changes had dealt a ëdeath blowí to the usage of annuities, instead arguing that he still expects to see between 100,000 and 200,000 annuity purchases made each year.
The Pensions Minister forecasted that the industry will begin to become more competitive and release more attractive offerings for retirees, as annuity providers are forced to adapt to the reality that pensioners now have a wider range of options available to them over their retirement funds.
Mr Webb also identified that in the future, pensioners would be given informal guidance, rather than formal advice about how to utilise the money from their pension pot, as the government seeks to push forward their reforms and grant retirees greater flexibility when accessing and taking money from their retirement funds.
ëMarket must work betterí
Mr Webb was speaking in front of the Work and Pensions committee to respond to questions about the recent reform in the way people can use their pension pots, with a greater degree of freedom being granted to retirees when using their money from their fund.
Prior to the rule changes identified in the 2014 budget, annuities had already begun to be heavily scrutinised for
offering poor value to customers, with rates attached to the product falling sharply in recent years and leading many to wonder whether they are financially worthwhile to purchase.
Statistics released by the Association of British Insurers illustrated that its members sold 353,000 annuities last year, which grant pensioners a fixed level of income each year in return for their pension pot.
If Mr Webbís predictions were to manifest in reality, then it would mean that these sales figures would be slashed in half from this year onward, though the Pension Minister has rejected the notion that this downward trend will culminate in the end of people using annuities.
He said: “I don’t think it is a death blow to annuities. Clearly there is a set of people, and we can argue and discuss how large that will be, who won’t buy annuities now, and estimates, and they are only guesstimates really, vary considerably.
“But clearly an awful lot of people still need an income in retirement.”
He continued: “Annuity providers will now know that people have got a realistic choice, which is not buying, just taking
some cash and investing somewhere else.
“And I think that will shake up the market in a way that an incremental reform wouldn’t have done. I don’t think annuities are inherently a bad product. But we clearly need the market to work better.”
He also highlighted that many people will likely purchase an annuity later on in their retirement or might opt to buy a smaller annuity than in the past to supplement other sources of retirement income that they might have.
Mr Webb was making the remarks on the backdrop of a report released by Standard Life, which illustrated that annuity sales in the country slashed in half in the immediate weeks following the budget.
Consultancy giants PwC previously forecasted that annuity sales would decline by a staggering 75% as a direct result of the pension reforms, estimating that the market would shrink from £12 billion to just £3 billion.
ëAdvice black holeí
Alongside the reforms made to the procedure in which pensioners can access their retirement funds, announcements were made about the introduction of a free, unbiased guidance service that all retirees will be entitled to receive to help them determine the best direction to go with their retirement savings. The government has already pumped £20 million into getting the initiative started, and is currently ironing out the final details to clearly map out what shape this guidance should take.
However, Mr Webb sought to point out that the new service would function to guide people about what to do with their pension funds, rather than give them concrete financial advice. He also elaborated that pensioners would be entitled to have in-person meetings with a market expert, but would not be necessitated to do so.
The new measure has been criticised in some circles for the high costs that the government will likely have to fork out in order to pay for it, with industry experts estimating that it could cost as high as £340 each year to deliver financial guidance to pensioners. It is now feared that a ìadvice black hole” could arise if people are unable to pay for impartial, independent advice in the future.
Mr Webb has previously argued that it might be worthwhile giving life expectancy forecasts to retiring workers in order to make it easier for them to financially prepare for their retirement.