The Future Of Annuities – What Lies In Store?
George Osborne’s bombshell back in March when he announced plans to allow 13 million DC savers the opportunity to make their own mind up with what to do with their pension pots shook the annuity market. As we approach 2015, we now ask ‘What lies in store for annuities?’
On March 19th, George Osborne announced what he described as “the most radical overhaul” of the pensions industry in 90 years as he revealed plans to allow Defined Contribution savers the chance to do what they wished with their pension money upon retirement.
This was a massive blow for the annuities market and resulted in nearly £4 ½ billion being wiped off the shares of the life insurance sector that same day. But is the future really that bleak?
What’s the upside for the annuity market?
Annuities will still be popular to some extent as they remain the only policy that can guarantee an income for life no matter how long the annuitant stays alive. That is an important point and those that don’t want to risk the scenario of running out of money if living longer than expected will still head to the annuity market.
New rules to permit “super annuities” could be a saving grace. Under these rules, much more flexible super annuities can be created which may provide the flexibility needed to save the market. Pensioners would have the flexibility to take lump sums from these annuities or to take a larger income in their first years of retirement. A lifetime guarantee could also be built into these types of annuities which would guarantee an income to a spouse for life, a change to the current standard of guarantee periods of a decade. This could be the evolution that saves the annuity market.
And what’s the downside for the annuity market?
Apart from the obvious disadvantage the market faces given that the historical business model for annuity providers has been shattered, the next biggest problem is the negative publicity itself. Things may not indeed be that bad, as explained above, but annuity providers need to distance themselves from the hype and outcry over the “death” of the market.
“One of the challenges is to overcome the negative publicity that annuities have attracted” said Billy Burrows in the Financial Times and he’s exactly right.
One of those other challenges is that annuity rates can, quite simply, be terrible. The return is not as strong as the other products that savers now have the independence to select instead if they prefer and an underlying rate of interest of 2% on annuities is going to do little to encourage savers to opt for an annuity. That said, the market will have to evolve and investment-linked annuities could be a solution.
Furthermore, the FCA has just announced that it will be probing insurers further to make sure that they are advising consumers of the best deal available for them, which obviously might not always be their annuity product.
This is great for savers in the run-up to retirement, however, and consumer group Which? commented : “The regulator’s proposals to ensure consumers have better information when they make big decisions about their income at retirement are sensible.”
So savers will certainly be able to get a better deal than they would have in the past, while annuity providers could be the ones to lose out. For savers interested in further information about the retirement options available to them, take a quick look at DAM’s retirement planning advice page.
Annuities, meanwhile, will have to evolve greatly. The annuity market will certainly shrink, but the better the product improves the less it should shrink over the coming years.
Photo credit goes to Lending Memo