ANNUITIES
Data from the Association of
British Insurers (ABI) (see table)
shows that while annuity sales
fell sharply in 2014, almost seven
million contracts were signed, most
of those after the new freedoms
were announced in the March 2014
Budget.
Tully accepts they won’t be for
everyone, but with the flexibility of
death benefits – and the addition of a
money-back guarantee – he believes
they will continue to satisfy the
requirements of anyone who has a
modest retirement fund of less than
£250,000.
SECOND-HAND ANNUITIES
In March 2015, Osborne announced
the possibility of a secondary
market in which to trade annuities.
Although welcomed by some
market commentators, others
considered it to be patent nonsense.
As the UK is now in the throes of a
general election campaign, McPhail
warns against investors holding on
for a chance to cash in their annuity.
“The secondary market feels like
a sideshow,” he said. “Bear in mind a
lot of what happened in the Budget
centred on things that cannot be
legislated for in this parliament.”
A Labour government – or a
coalition led by Labour – may see
a move away from these freedoms
altogether, as many experts are
concerned the reforms have
damaged the annuity market.
“After all, an annuity remains the
best method of distributing wealth
in a market that ensures people do
not run out of money,” said McPhail.
There may be a benefit at the
lower end of the market where
very small amounts of income may
appear less appealing than a lump
sum. However, Tully has a problem
with commentators who say this is a
way to exit a poor value annuity.
Even if at the point of
annuitisation the investor could
have received another £1,000 a year
from shopping around, they will
10
“AN ANNUITY REMAINS
THE BEST METHOD OF
DISTRIBUTING WEALTH
IN A MARKET THAT
ENSURES PEOPLE
DO NOT RUN OUT OF
MONEY”
only be offered a price based upon
what they paid for their annuity, said
Tully.
This doesn’t right the perceived
original wrong, he says, but merely
“crystallises a poor value income
stream into a poor-value lump
sum”. Would that be appreciated by
consumers?
Perhaps in some cases, he suggests,
but does that make it right? He adds:
“If the Financial Conduct Authority
thinks people were actually mis-sold
annuities, they should do something
about that, not look at such a
convoluted way of addressing such a
problem.”
WINNERS AND LOSERS
Mark Polson, principal of specialist
financial services consultancy the
Lang Cat, says the only winners
from a secondary annuity market
are likely to be the life companies
and their shareholders.
“If the annuity market is not
working properly, you’re simply
allowing consumers to be screwed
again,” said Polson. “You’d have to
trust life companies to give a better
deal than they have already, which
would simply destroy shareholder
value.”
Women will be double losers,
as gender equality has also
undermined annuities.
“Women now cannot get better
levels of annuities than men, so
while the price may have been
gender-based on purchase, it cannot
be on resale,” Polson added.
“This only works if you forget the
individual consumer, package it up,
collateralise it and trade it. And we
all know where that got us with the
mortgage market.”
With little chance of a workable
solution for trading an annuity, the
freedoms will still have a positive
influence on the annuity market, as
far as Polson is concerned.
Savers may shop around more
than they did before, and if making
an active choice, may choose a better
rate.
Insurers may also bid more to get
annuity business, which they need
to balance their books.
WHAT HAPPENS NEXT?
McPhail expects variations on
guarantees and death benefits and
perhaps switching options that
may provide an opportunity to
periodically withdraw a small sum
in exchange for a reduced monthly
income.
He also expects to see renewed
development of deferred annuities
to provide an income stream that
kicks in at around 85 for later
life care, for instance. Pricing was
considered expensive in the past,
but it offers an elegant solution for
anyone who runs the risk of running
out of money in old age.
Polson believes that cashflow
matching – which is common
in mature occupational pension
funds – may have some future at an
individual product level.
The market is getting closer to the
point where investment companies
may offer something that targets
individual liabilities.
“This may be a combination of
products or through the use of
target date funds, which have a set
maturity in a certain year", says
Polson.
What is certain is that annuities
will have a place in the market and
will increasingly be blended with
other savings such as drawdown and
ISAs to deliver greater security of
retirement income to consumers.
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