Published on January 19th, 2015 | by Pete0
Annuities in 2015
“Let me be clear: no one will have to buy an annuity.”
With these words in his 2014 budget speech, Chancellor George Osborne announced radical reforms to the pensions market. The biggest changes to how we access our pension funds will come into effect from 6 April 2015, allowing retirees the most flexible access they have ever had, leading some to proclaim that this will be a “death blow” to annuities. But with annuities still being the only option that will truly guarantee you an income for life in retirement, can we really write off annuities as a common form of retirement income generation?
“There will be those to whom absolute financial security in retirement is paramount; for these clients annuities will always have an appeal. Also those in ill health can get distinct benefit from [impaired and enhanced] annuities.” – Mark Ridgement, Director at Cornwall Finance and Investment Services.
The security of a guaranteed lifetime income provided to retirees with the purchase of an annuity is just one of the major benefits that alternative such as trivial commutation and drawdown cannot offer. Many can also benefit from higher rates with what are known as enhanced or impaired annuities. These products are offered by providers to those retirees that are deemed to have a lower life expectancy than the national average. This could be through lifestyle choices (such as being a smoker), having a pre-existing medical condition or even if you simply purchase the annuity later in life. Trivial commutation and flexible drawdown, while allowing you flexible access and greater control over your pension savings come with a great deal of risk and responsibility in order to manage your retirement income.
It’s no secret that annuity rates have been in steady decline over a number of years, yet it’s a lesser-known fact that 2013 actually saw a record rise in rates – the biggest yearly increase since 1994. With this in mind, how do experts feel rates will look in the year ahead? Peter Cole, Managing Director of Henderson Armstrong believes it’s difficult to predict at present:
“Rates may reduce owing to the reduced numbers sold. This is due to usual costs not being diluted. [Or] rates may increase as a result of providers trying to ‘attract’ business… The reforms though are already, and will undoubtedly continue to reduce the appeal of annuities as most people prefer to have the option of accessibility.”
With the introduction of the new rules from April 2015, it’s likely that we will see a decrease in the number of retirees purchasing an annuity, with Mark Ridgement predicting “under 30% of the overall ‘at retirement’ market”. Many IFAs believe that this will likely mean we’ll see a decrease in rates in the short term, as we progress through 2015 and into the years ahead, we should see annuity providers taking steps to increase rates in order to make annuities seem a more attractive prospect once again.
Despite George Osborne stating that nobody will need to buy an annuity, for many retirees they will still remain the sensible choice. The risk and responsibility that they remove means that many will feel secure in the knowledge that they are guaranteeing themselves an income for life. As Peter Cole concludes:
“Annuities will continue as they offer an income guarantee for life. This remains attractive to the risk-averse. Also those in poor health will continue to enjoy ‘improved rates’. “The reforms though are already, and will undoubtedly continue to reduce the appeal of annuities as most people prefer to have the option of accessibility.”
Ryan Smith is one of the content writers at Compare Annuity, working with a carefully selected network of annuity specialists offering retirees free, no-obligation quotes and advice on annuities.