Eighteen months on from pension freedoms and George Osborne’s message that ‘nobody will have to buy an annuity’ has been taken to heart, with fewer than 20 per cent of people now choosing the annuity option – a far cry from the 80 per cent who were shoe-horned into annuities prior to pension freedoms.
Pension freedoms have therefore broken the previous retirement income model, but has the industry kept pace with this change? Have we seen the product innovation many anticipated would fill the void left by the demise of annuities?
Before we tackle the second question, let’s look at innovations we have seen.
In terms of providing a secure income for life, annuities are the only solution that are guaranteed to tackle the risk of living too long. For people not willing or not able to take on the risk of an invested solution, annuities remain the go-to retirement income solution.
Annuities are often maligned for the fact if you die relatively young, the insurance company will keep your money. Due to HMRC rules, the maximum annuity guarantee period was only 10 years, but post freedoms, new rules have allowed annuity providers to offer guarantees for up to 30 years. So, if you do not want your insurer to keep your money you can buy a long guarantee.
The table below shows current rates (from the MAS website) for different guarantees, as well as the amount of capital each guarantees to return. Rates are for a healthy 65-year-old buying a level annuity.
| Monthly Income | Annual Income | Guaranteed Capital | Percentage Capital Guaranteed |
0 Years | £390 | £4,680 | £0 | 0% |
10 Years | £384 | £4,608 | £46,080 | 46.1% |
20 Years | £369 | £4,428 | £88,560 | 88.6% |
30 Years | £326 | £3,912 | £117,360 | 117.4% |
Clearly, the longer the guarantee the more likely you are to call on it and hence the lower the income you are going to receive. The idea of guaranteeing more than the original capital is paid out will be attractive for some, but one wonders if the attraction of ‘jam today’ will be too compelling versus the idea of ‘jam tomorrow’ or ‘jam for somebody else’.
With annuities now being shunned by such a majority, one might expect much greater innovations in other areas. Perhaps the biggest innovation we have seen is in the hybrid product space, with products that look to provide a combination of annuity and drawdown, or security and flexibility, under one wrapper.
Retirement Advantage and Partnership Assurance are two companies that launched products in this space, albeit only the Retirement Account from Retirement Advantage is currently available. This product allows an annuity to be held under a drawdown wrapper with the remaining funds held in drawdown.
One of the key innovations is that the product provides some flexibility, allowing annuity income to be paid out or switched off and retained within the tax-efficient drawdown element. This is a neat solution and one could argue it is a good way for all annuities to be written in future.
It also works to deliver a cost-effective combination solution for the many average size pension pots and some larger pension pots where perhaps only a relatively small part of the fund will be retained in the drawdown element. However, packaging the annuity and drawdown together does come with some compromises; a reliance that the provider’s annuity rates are competitive and will remain so, and potentially reduced investment choice and flexibility.
