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Return of the annuity?

ended 06. September 2022

An IFA on Newspage has said that in recent months he has seen the way clients access their pension savings at retirement change dramatically. Since the introduction of 'pension freedoms' in 2015, clients tended to take their pension income directly from their fund and leave it invested, i.e. flexi-access drawdown. This is because the alternative was to purchase an annuity. But with interest rates rising, he says providers are now offering much better annuity rates so he is seeing a surge in customers asking for this type of pension income at retirement. That, coupled with very volatile investment markets, has led to a major increase in demand for annuities. A healthy 65-year old, with a pension pot of £100,000, can buy an annuity with a level rate of 6.2% (£6,200 of income). This is up significantly from their lows of January 2021 when the same fund would only have provided £4,800 per year. With interest rates continuing to rise, he predicts a further increase in these rates and even more pensioners opting to access their pension savings via an annuity.

  • Are you seeing this trend, too?
  • Are you expecting annuities to regain their popularity in the months and potentially years ahead? If so, why?
  • Have you got any clients who would be profiled in a national newspaper? They'd need to be named and photographed. They wouldn't need to share specific financials, just the fact that making an annuity made sense for them giving rising rates, etc.

Any other thoughts, jot them down.

3 responses from the Newspage community

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Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
In recent months the way clients access their pension savings at retirement has started to change dramatically. Since the introduction of 'pension freedoms' in 2015, clients tended to take their pension income directly from their fund and leave it invested, i.e. using flexi-access drawdown. This is because the alternative was to purchase an annuity. But with interest rates rising, providers are now offering much better annuity rates and we are seeing a surge in customers asking for this type of pension income at retirement. Rising interest rates, coupled with very volatile investment markets, has led to a major increase in demand for annuities. A healthy 65-year old, with a pension pot of £100,000, can buy an annuity with a level rate of 6.2% (£6,200 of income). This is up significantly from their lows of January 2021 when the same fund would only have provided £4,800 per year. With interest rates continuing to rise, we're predicting a further increase in these rates and even more pensioners opting to access their pension savings via an annuity.
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Tim Mottram
Financial Planner at Grey Parrot Financial Planning
A seriously wrong assumption is made if you advise a client to buy an annuity at 65, namely that they will need the same income for the rest of their life. In 2022, there is around a 1 in 10 chance of living to 100. Retiring at 65 and buying an annuity would therefore mean 35 years tied to the same monthly income. When we build a financial plan for our clients, we ask them to think about how much money they need in retirement. Our clients complete an expenditure forecast for two stages of their retirement: the part where they are young, fit and healthy enough to enjoy life and a later stage where health potentially declines. From experience, retirees want to spend more earlier and less later on. Annuities are perfect for later on, post 80/85, when people become less active and may prioritise not running out of money. Many clients are surprised to hear they can initially have a drawdown pension and postpone buying an annuity until later. Most thought it was a one-time option for retirement. Of course, as health declines, annuity rates get better if you take an underwritten option that considers any health concerns. Another option is using annuities to cover the cost of monthly essentials, leaving discretionary spending in drawdown. Investors can have part drawdown and part annuity: it doesn't have to be all or nothing. For conservative investors, this may be an attractive idea as food/council tax/utilities must be paid each year between retirement and death. It's the discretionary elements that tend to be higher earlier in retirement. Finally, inflation and poor market returns are front of mind this year. Letting short-term events influence long-term investment decisions is not usually a good idea, especially when buying an annuity is final. There are no refunds. After analysing a client's plans using cash-flow tools, we would encourage them to consider a solution that best meets their needs and risk profile, and for some people that may be an annuity.
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Joshua Gerstler
Chartered Financial Planner at The Orchard Practice
The use of annuities is starting to creep back into conversations with clients for the first time in quite a few years. Although we have not yet had anyone take the plunge, if rates continue to rise, then I envisage annuities once again becoming a key part of retirement planning, used in conjunction with a drawdown account, which will provide people with the ability to have certainty over part of their retirement income and flexibility from the other part.