Annuities play their part in the drive for financial security
Annuities play their part in the drive for financial security
Annuities are back in fashion as more people search for certainty in an uncertain world.
The market has witnessed a resurgence following the spiralling in interest rates over the last two years.
Sales soared in 2023 with a total value of £5.2 billion, a 46% hike on 2022, the highest annual value since 2014 when pension freedoms were announced, granting retirees more flexibility over how to access their retirement savings. A bumper fourth quarter saw £1.5 billion in sales.
Figures from the Association of British Insurers (ABI) found the number of annuity contracts also mounted – to 72,200, up 34%.
Put simply, taking out an annuity means paying an insurer a lump sum and getting a guaranteed income in return. To deliver, insurance companies choose “safe” investments such as bonds, gilts and mortgage-backed securities. As interest rates rise, so do bond yields, meaning an increase of one per cent turns into an 8-10% jump in annuity rates.
Interest rate growth may be bad for homeowners with mortgages, bad for businesses looking to borrow, but they are good for annuities. However, now interest rates appear to have peaked, it may not be long before annuity rates dip.
Time to get in quick then if annuities fit your circumstances.
Nick Flynn, retirement income director at Canada Life, told FT Adviser: “Annuities have been on quite a remarkable journey.
“While many had effectively written off annuities due to the perceived poor value being generated, they are now very much back in vogue. Consumers are seeking retirement income security in uncertain times.”
In a perfect storm, he added, annuities were the only safe ship in town that could generate 100 per cent income security.
Once, retirees were required by government to buy an annuity. That all changed with pension freedoms. Drawdown was typically seen as more flexible, and better value for most. Opting for an annuity remains an irreversible choice.
Annuities can be complex. There are different types. For example, a joint annuity pays an income to a spouse or civil partner when you die. An escalating annuity pays a lower starting income but then increases each year. An enhanced – or impaired – annuity pays a higher income due to the customer having an illness or health condition. For example, if you’re a smoker, stroke victim, or have cancer.
And you need to shop around. Just Group found that a healthy 75-yearold can secure about 17% more income from the best annuity provider compared to the worst, describing this as the “closest thing to ‘free money’ in the retirement world”. In cash terms, such an individual buying an annuity with a £50,000 pension could expect about £4,661 income each year for the rest of their life from the most competitive provider compared to £3,980 from the least competitive.
Neither do you have to use all of your pension pot to buy an annuity. One strategy is to use part of your pension to generate a regular and secure income and then access the rest via drawdown.
So, lots to think about, which is where a financial adviser or annuity broker comes to the fore.
Research on behalf of the ABI suggests that when professional guidance is ‘personalised’ to an individual’s circumstances, it can lead to a better financial outcome.
Rob Yuille, the association’s head of long-term savings policy, said: “We’d like to see more people taking advantage of professional advice and new forms of targeted support for consumers to ensure they can enjoy the best possible retirement. Securing a guaranteed income for life remains an important part of the mix of options for people to consider.”