ABI data shows that 2023 was a good year for annuity sales which totalled £5.2 billion.
More people buy annuity rates when interest rates are rising. Annuities fulfil a need people have to secure a reliable retirement income for life
But the ABI worry that the number of retirees taking advice before buying an annuity remains low.
in this blog, I argue that people purchasing an annuity are the least vulnerable members of the financial community and , far from worrying they are not taking advice, we should look to the annuity broking system they are using as a model for most of us.
It is not just that advice is expensive, it is because very often it is unnecessary and sometimes creates conflicts that cause more harm than good.
First the facts
Annuity sales soared in 2023 with a total sales value of £5.2 billion, a 46% increase on 2022. This is the highest annual value since 2014 when pension freedoms were announced. These freedoms granted retirees more flexibility over how to access their retirement savings and introduced choices that had previously had been inaccessible to those with DC “pots”.
This record year included a bumper fourth quarter which saw £1.5 billion in sales, off the back of a strong third quarter when sales totalled £1.4 billion. The momentum is with annuities and with interest rates “staying higher for longer”, annuity sales look set to remain high or go higher
The number of annuity contracts sold also increased in 2023, to 72,200 (+34% on 2022). This is the largest number recorded since 75,000 were sold in 2016, not only are people annuitizing more of their retirement savings but more a wider range of people are buying.
People are buying the highest initial income they can and not looking for delayed gratification.
Level-only annuities, which pay the same income every year but can be vulnerable to inflation, remained the more popular version of the product, at 82% of the total number sold. This type of annuity has a higher starting income than an escalating annuity – which provides an income that increases every year. The proportion of escalating annuities sold increased by only 2% compared with 2022, making up the remaining 18% of total sales.
2023 also saw 64% of annuity buyers shop around – taking an annuity from a different provider to the one they held their pension savings with. These buyers accounted for 70% of the total value of annuity sales in 2023.
But only 29% of customers who bought an annuity did so with the help of professional advice.
People buying for themselves
The purchase of an annuity is generally considered a painless process by those who do it.
I signpost annuity inquiries to Retirement Line. This is why
Just , Hargreaves Lansdown and Punter Southall also offer highly pleasurable buying experiences because the product offering is clear and the journey to the best rate is easy
Retirement Line will even pay you £250 in M&S vouchers if you can buy cheaper elsewhere.
There is no charge for annuity broking, built into the annuity rate is a commission to each annuity broker, the broker can choose to rebate this commission to increase the rate and most have “decency levels” so that the commission is capped. Despite this being unregulated , the standards of disclosure meet – in my opinion – the standards of the consumer duty.
Annuity brokers define their ambition
I suspect that another reason for the success of annuity brokers is that they stick to the knitting. They offer a wide range of options within the product ,but the product itself is easy to get to grips with , making comparisons between annuity offers relatively easy to make.
Experts may moan that people prefer high initial income rather than being shoehorned into inflation linked annuities or annuities with fixed rates of increases. But it is more than a little patronising to people making life changing decisions , that they cannot work out this trade off and similar trade offs with first and second death varieties, capital guarantees and even the choice of fixed term or lifetime rates.
People do not need a lifetime of financial education to make an annuity purchase, as with mortgages, they need to be expert for an hour, an hour when they make their final decision.
Annuity brokers aim to make people expert for an hour. “It seemed like a good idea at the time” , need not be a throwaway statement, many of us make important decisions without memory of why, many older people (myself included) can’t remember too much in any event and it isn’t getting better!
The need for advice
For most people, retirement – especially in the early years is a time when the pattern of work changes from having a job, to having lots of jobs , most of which are done for pleasure rather than financial gratification. They can include caring for kids or elderly relatives to being involved in charities, through to remunerative jobs forming part of a “portfolio career”. Most of these lifestyle choices are taken without “career coaching” and in consultation with friends and family. Where advice may be needed can be around tax and benefits, the latter is helped by Citizens Advice and the variety of websites – including those of charities and sources of help such as MoneySavingExpert , Mum and Gransnet.
At the other end of the spectrum those needing help with tax and legal issues can source most of what they need from the web and will only go for advice when needing confirmation. People tend to know when they need advice and use tax advisers and lawyers sparingly.
There is a proportion of people both sophisticated and simple, rich and poor who want things done for them and choose to outsource decision making to others. Look at the statistics above and you can see that 30% of people who buy annuities don’t even look for the best rate but trust that the default rate offered by their saving provider is “good enough”. Of course some of these offers are unbeatable today, especially where the guaranteed rates were issued back in the day where interest rates were 10%+, but many people sacrifice rate for convenience and trust in the consumer duty of providers not to rip them off.
At the other end of the scale are those who consider they have sufficient wealth and complexity of choice to warrant their employment of a financial adviser as a fiduciary manager, taking a charge on large parts of their estate in return for holistic financial advice on anything from lifestyle to tax and investments. The charge on assets can seem high but organisations like St James Place are regularly placed high in the list of trusted organisations, despite the fees.
In short , the need for advice varies according to people’s degree of trust in defaults and their capacity to do it themselves. Financial advisers are right for a certain type of person but not for everyone or for everything. Purchasing an annuity appears to be something that most people feel they can do without taking financial advice and I suggest that is a great credit to annuity brokers. Let’s hope the FCA’s consumer duty will mean that nobody gets seal-clubbed by despicably low annuity rates offered as a default.
Annuity broking – a blueprint for the future?
Annuity broking is very hard to get right but lucrative when you do. There are very few annuity brokers relative to the number of financial advisory firms and the number of potential clients. Annuity broking is a minority sport dominated by a few very good brokers.
It shows that a functional market can emerge without regulation from either TPR or FCA and it suggests to me there is scope for innovation using its simple user journeys to expand choice to other pathways.
Smart organisations like Punter Southall are already offering wider choice through its Pension Potential Service . Guiide and AgeWage represent other platforms for choice looking to broaden decision making. Just’s Destination Retirement and Hub products are also working to help people take decisions either side of the advice/guidance boundary.
Innovation is needed both in the products people can choose to manage their retirement income and in the platforms from which they can select them.
When it comes to choice, no one does it better than the annuity brokers. We should look to them for the innovation that helps us with the nastiest hardest problem in finance.
A table showing the IRR of a level annuity over a range of survival terms would be useful Has anyone constructed such a table? If so would you share the research.
How many take the 25% and buy a PLA to enhance the net income ? Do IFAs today know that PLAs exist?
Another useful source of free impartial help for all is MoneyHelper.org.uk
which includes a whole of market annuity comparison tool.
The really nice thing about MoneyHelper is that they don’t insist on phone numbers and then the follow up selling phone call. I’ve tried a couple of others using a broken phone number I happen to have, and each of them has tried phoning then followed up with pleading emails about how they want to talk to me. If I’m playing with ideas I want to tweak parameters (indexing etc) to see how that affects an annuity. MoneyHelper is about the only site I’ve found that lets me do that. Most annuity providers don’t understand the concept of a comparison site and really need to do some research.