Annuities Boost Improves Prospects for Pensioners
Average annual annuity incomes rose by between 1.4% and 4.8% in the first half of 2018, according to Moneyfacts’ latest UK Personal Pension Trends Treasury Report, marking a strong comeback after falling to historic lows in the wake of the EU referendum in 2016.
Annuities are insurance policies, purchased with your pension pot, that give you a guaranteed income for the rest of your life. They used to be very popular but sales of annuities have declined 80% since pension freedoms were introduced were 2015, allowing more people to opt for income drawdown, siphoning some money out of their invested pension to live on in retirement. The decline was furthered by the low and falling returns offered on annuities. Annuity incomes slipped between 3% and 6% each year between 2014 and 2016.
Moneyfacts’ report indicates a strong recovery in annuity payouts this year, despite a reduction in the number of providers in the market. Annuity incomes have risen 14.6% since the Brexit vote and are now just 1.2% lower than when pension freedoms were implemented in April 2015. A net increase in 2018 could make this the first time in a decade that annuity incomes have risen in two consecutive years, following 2017’s 1% increase.
According to Moneyfacts, as of August 2018, 65-year-old with a £10,000 pension can now receive an average of £476 a year in annuity income, up from £473 in April, while those with pension pots of £50,000 can earn £2,626 a year, up 1.2% this quarter.
"Despite their much-reduced popularity, annuities remain the only at-retirement product that enables individuals to insure against investment and longevity risk," said Richard Eagling, head of Pensions at Moneyfacts.
The increase in incomes, “raises the question as to whether an annuity would be a more suitable option for risk-averse retirees currently holding cash in their drawdown plans for no long-term strategic reason,” he added.
Increases in life expectancy could also drive a resurgence in annuities. The Office of National Statistics found that the number of UK residents living to 100 has quadrupled in the last three decades.
Additionally, a shrinking market means that the gulf between the highest and lowest annuity incomes available has contracted to just 4.9%, down from 16% before pension freedoms were introduced.
"While the narrower annuity income spread arguably reduces the risk of consumers locking themselves into poorer-value annuity rates, it does raise the possibility that individuals could become complacent, and view a 5% difference as not being enough of an incentive to shop around,” Eagling said.
However, the Financial Conduct Authority (FCA)’s requirement that annuity providers inform consumers of better competing offers could counteract complacency and keep the market competitive.
The announcement last week that the Bank of England base rate would rise 0.25% to 0.75% has raised the possibility that annuity incomes could increase further. Annuity providers invest pensions received in government bonds, the yields of which have been historically low, given the low-term freezing of the Bank of England base rate at 0.25% and 0.50%. An elevated base rate could theoretically boost gilt yields and thus annuity rates, although neither has materialised since the announcement.