Income

Annuities make a slow comeback as retirees seek income certainty – DC and auto-enrollment

A PPI brief published on May 26 showed that the average pot size used to purchase an annuity rose from £37,000 in 2015 to £71,000.

But in recent years, more pots under £10,000 have been used to buy these products. These small pots represented 16% of total annuity purchases in 2016-2017, while in 2020-2021 they were used to buy almost a quarter of all annuity purchases.

Claire Altman, managing director of individual retirement at Standard Life, part of the Phoenix Group, noted that this is an interesting time to re-examine the role annuities can play.

If this market is to grow again, it will need to dispel the misconceptions that many people have about annuities and explain how they can be used in combination with the levy, rather than as an alternative to it.

Claire Altman, Standard Life

“With [defined benefit] provision continues to decline, stock market volatility increases and people continue to underestimate their own longevity, annuities can play a valuable role in income security,” she said.

“However, if this market is to grow again, it will need to dispel the misconceptions many people have about annuities and explain how they can be used in combination with a drawdown, rather than as an alternative.”

People over 75 flock to pensions

The PPI briefing note says another trend is that the number of annuities purchased at age 75 or over has doubled as a percentage over the past five years, according to data from the Financial Conduct Authority.

Mark Ormston, director of proposals at Retirement Line, said this suggests people may appreciate the value of guaranteed income more as they get older.

He added: “It will be interesting to see if this potential trend will continue in the years to come, as it has been thought for some time that many people could turn to an annuity to provide a secure guaranteed income later in life. life. So far, the data we have from pension freedoms seems to support this view.

“There are many reasons why people may consider annuitizing later in life, including the fact that annuity rates improve with age. Currently, a 65 year old can expect an annuity rate of around 6%, while a 75 year old can expect an annuity rate closer to 8% (providing an annual income 33% higher than at age 65). ).”

Annuities can help reduce longevity risk

The PPI noted that annuities can also help reduce longevity risk, with the briefing note stating that “over the past 40 years, life expectancy at age 65 has increased by almost six years for men and five years for women.

This means that retirees could benefit longer from having a reliable income through annuities, but also means that those who withdraw large sums in retirement will be forced to make their kitty last longer.

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“If the improvement in longevity continues at a similar rate in the years to come, when I reach the age of 65, it may well have increased by 10 years or more in my lifetime alone,” said Ormston said.

“With this in mind, I strongly support the idea of ​​providing regular access to and promoting the use of longevity tools and accurate annuity quotes throughout people’s retirement journeys, and not just at the first access point for the first time.”

The note set the stage for a future report to be released in the fall, which will assess the optimal time to purchase an annuity.