To mark another rise in interest rates , I was about to write a blog about annuities when my young friend Mark Ormston dropped this set of slides into my inbox!
What’s left of the annuity market – since George Osborne promises none of us would ever have to buy an annuity again, is well ordered and appears to be functioning well.
Ironically, people who buy annuities are the people who take advice and attend a guidance session with Pension Wise.
My thanks to Mark Ormston for his analysis of the FCA’s data and his perceptive insights from which I quote below.
What Mark notices
Mark reports that the annuity market has been fairly stable across all reporting periods. At least 10% of pots accessed were used to purchase an annuity and in recent years, over 4 billion pounds of funds have purchased annuities each available reporting year
● There are some early signs of annuities being purchased later in life (aged 75+). However, the numbers remain very small and as the data shows, there is little difference between annuities being purchased by those above and below 65.
● At least 60% of annuities purchased are with pot sizes of £49,000 or less and in the latest reporting period, nearly a quarter (24%) of annuities purchased were with a pot size of less than £10,000. That people are buying pensions with such small pots is surprising.
● The majority of annuities sold are single life, level, without any capital protection and include some sort of guarantee period. Mark believes these options largely marry up with what consumers are first shown when provided with indicative annuity quotations
● Having a larger pot size doesn’t necessarily mean you’re taking regulated advice. The data shows that the two pot size bandings most advised on are £10,000 – £29,000 and £50,000 – £99,000. The largest pot size band (£250,000+) shows the smallest uptake of regulated advice. This takes some explaining.
● Nearly 60% of annuities purchased in this period were after advice or a Pension Wise consultation. This either tells us that annuity purchasers are conscientious or that advisers and Pension Wise are presenting annuities in a rather more positive light than George Osborne.
A model or a miracle?
We shouldn’t be surprised that people choose to buy annuities. They are after all the only way you can turn a pot into a pension and for those who enjoy the security of a wage for life (me included) they are a comfort.
What is surprising is that many people have locked into historically low annuity rates , artificially depressed by the Government’s Quantitative Easing programme and the low interest rates and gilt yields that it has brought. People aren’t getting full value from their pension pot, so long as interest rates lag inflation as they have.
However, the insurance industry is finding ways past the barriers set by Solvency regulations and is inventing ways to invest monies it receives from pension pots into worthwhile projects that yield more than gilts and provide environmental and social good as well as improving governance. This is meaning that investing in an annuity is becoming more financially lucrative and better news for the environment and for society.
As interest rates continue to climb, the argument for annuities will grow stronger. Annuity rates will improve, investments linked to the market will continue to trouble those in drawdown and more people will decide to purchase a wage for life solution. Which is good news for the annuity market which is showing itself well managed and customer friendly.