Annuities - Back for Good?

Whatever I said, whatever I did, I didn’t mean it. Annuity premiums are now on the comeback trail and have hit their highest levels since 2015. So, take that drawdown. Annuity premiums for the first quarter of this year rose to £1.2bn, according to the Association of British Insurers (ABI). There was also a rise in the number of people switching provider, with people purchasing an annuity from a different provider to their current pension savings provider. The ABI said retirees are also focussing on products which can offer a degree of protection against inflation, with the sale of escalating annuities, providing an income that increases every year.

Annuities offer a guaranteed income for life and more people are taking advantage of the protection annuities have to offer, especially given the current more favourable rates. However, it remains important to shop around as research shows around a third of people are likely to be missing out on additional income by not doing so. Shopping around is particularly important because it’s the closest thing to ‘free money’ in the retirement world and so staying loyal to a provider can be costly.

Annuities inhabit a unique space in the retirement world, as they represent a solution that removes both investment and longevity risk.  After all, many retirees like the peace of mind of having a level of secure income to pay the bills and to support their lifestyle.

Where have annuities been all this time?

Until recently, the yield on government gilts has been very low. In turn, this has made annuities a relatively expensive product for providers to fund.  As a result, annuity rates and subsequently their demand have been on the low side – comparatively speaking when looking back 25 to 30 years. However, gilt rates have now been rising resulting in higher annuity rates. In late September and early October 2022 there were some particularly sharp increases but that’s a good question for another time.

Despite annuities becoming more popular, there is still more awareness needed of the flexibility of fixed-term annuities and the benefits of enhanced annuities. People are generally surprised by the uplift in income that can be gained from a wide range of medical conditions, including diabetes, or just from lifestyle choices like smoking and drinking.

Given the increases in annuity rates, an annuity as part of a retirement strategy alongside drawdown, is also looking increasingly attractive. Leaving part of the pension invested can be a hedge against inflation - a personal inflation pot that will hopefully grow over time. Additional income can be taken from that pot to top-up the annuity in future years, or another annuity can be purchased, so it is most definitely not a case of one size fits all.

Phasing annuity purchases throughout retirement can not only de-risk your retirement journey, but you can also potentially benefit from better annuity rates as you get older. With the right value protection, you can ensure your income stream is protected and be passed to loved ones.

Advice therefore becomes increasingly more beneficial, helping clients to understand whether an annuity is right for them and aligns with other choices they make in life or different stages in life – for example, inheritance planning. This requires more than just technical knowhow. It requires a multi-layered approach.

While an annuity is often presented as a very simple product (the idea that a client can just pass all their money to an insurance company and they will do the rest), in reality, people are being asked to make a decision that will impact their household income for the rest of their lives and potentially beyond. Do they want inflation protection, and if so, how much? Do they want to guarantee an amount of income is returned whether they are alive or not? Do they include a partner on the annuity?

Additionally, certain perspectives can also play a key role in financial decisions, such as views on investments, cash and how someone thinks it will impact them and their finances overall.
For those at the point of retirement, this will include the pros and cons of annuities and drawdown while also keeping one eye on the potential for care requirements further down the line. The ability to interpret and find the right solution for a client is what great financial advice is all about. 

Avoiding foreseeable harm is not the same as having no risks at all. For example, in drawdown, investment risk is a potentially foreseeable harm that an adviser can look to mitigate as much as possible but is likely to be ever-present to some degree. The question is how is it being managed, does the client understand the risk and is the client comfortable? Not forgetting, where there is potential risk, there is also potential gain.

It is important clients are aware of all of the options.

Ultimately, most solutions are not perfect, so the right option, balance or combination of options is crucial.

If you think you might want to discuss the spirit of any of the points raised in this article, please feel free to contact your usual Dentons Wealth Independent Financial Adviser.