The Daily Telegraph - Saturday - Money
Pension peril Annuity firms give up
As insurers quit the market, the options for those who want a guaranteed pension are shrinking, writes James Connington
Prudential, one of Britain’s largest insurers, has become the latest in a growing list of providers to quit the annuity market. Where does that leave pensioners who are seeking a guaranteed income? To date, seven firms have ceased offering annuities to the open market since pension freedoms were announced in 2014, although some still sell annuities to their own customers.
The pension reforms effectively gave savers the right to take their entire pension as cash, or keep it invested, and resulted in sales of annuities plummeting overnight.
Yet many still want the safety net of guaranteed payments and they are faced with an increasingly uncompetitive market.
Rates have nearly halved over the past decade. Of the seven providers selling the contracts – which can pay a fixed or “level” income or one that is linked to inflation – on the open market (see table), only five offer standard annuities.
These are for people in average or above average health.
Two firms exclusively offer “enhanced” annuities, which pay out a higher annual amount for those with a lifestyle likely to result in a lower life expectancy, such as people who smoke or have diabetes.
Annuity rates
Rates have increased since the middle of 2016, when they hit lows of less than £4,500 a year for a 65-year-old with a £100,000 pot, but still remain historically low.
Annuity rates are closely linked to the yield on government bonds, which declined dramatically following the 2008 financial crisis.
As the crisis hit, annuity rates of just under £8,000 were available for the scenario above.
At present, for a 65-year-old with a £100,000 pot buying a standard annuity (with no payout on the annuitant’s death), the best annual income on offer is £5,151, according to investment shop Hargreaves Lansdown.
If they were buying an enhanced annuity – as a heavy smoker with high blood pressure and cholesterol – they could get up to £6,651.
What happened to annuities?
The stable, lifelong income offered by annuities used to make them the default – and in many cases only – option for savers reaching retirement.
However, low interest rates have increased providers’ costs, as has increasingly onerous regulation surrounding capital reserves. Pension freedoms, introduced in 2015, opened up other options. Individuals can now make use of drawdown to take an income while remaining invested, or even take full control of their pension pot.
Danny Cox, a financial planner at Hargreaves Lansdown, the investment shop, said: “The pension freedoms turned annuities from the most popular way to take a retirement income to almost an also-ran.”
He said using a mixture of an annuity to secure a basic income and drawdown for any additional needs had become a popular choice among those tapping into their pensions.
‘Annuities have gone from the most popular choice to an also-ran’