The Budget announcement on 19 March shocked the entire annuity market, with the share price of some insurers halving on the news of increased flexibility at retirement. Being an annuity broker, The Annuity Bureau also felt the effects, with a number of clients wanting to cancel their annuities the next day – two cancelled before 9am! However, having since contacted all our clients to make sure they had seen and understood the proposed changes, we found that the overall reaction has been more mixed.
Interestingly, a number of pensioners still preferred the security of a guaranteed income for life that only an annuity offered. Many had not appreciated that the income taken under the new rules (above the 25% tax-free amount) would be taxed at their marginal rate. For some, this could mean paying higher rate tax for the first time in their lives. Others were interested in the new flexibility but needed income immediately. The Governments’ decision to remove the need to buy an annuity within six months of taking the tax-free amount helped here, as well as some insurers acting quickly to offer temporary annuities with guaranteed funds paid when the new flexible regime is in place. Some are considering securing a “safety net” level of income through an annuity and using the new flexibility with their remaining assets.
For those intending to use the new flexibility, it is crucial that they understand the risk of running out of money. In our experience, people often underestimate how long they will live in retirement. A recent survey by insurer MGM Advantage shows that men underestimate how long they will live by an average of five years and women by an average of ten years.
The new system also means that insurers no longer have their hands tied in how they design their annuities. Possible product innovations could include annuities which pay higher income in the early years of retirement and then decrease in later years. This would be designed to be a better fit for the spending pattern of a pensioner, but importantly it would still provide an income for life. Some insurers are looking for ways to overcome the concern of dying shortly after buying an annuity by extending what is known as the guaranteed period. This means that the annuity would be paid for a pre-determined period regardless of whether the retiree is alive or not. Currently this guaranteed period is limited to ten years, but 20 year guarantees are now being floated.
Far from suggesting that annuities are dead, the above seems to show that the insurance market has fallen on its feet and the initial headline was merely a knee-jerk reaction. Importantly, if appropriate guidance is given to pensioners, many are likely to still see annuities as a viable option – or part of the solution. Meanwhile we also expect some profound changes in the market – the volume of annuities sales may go down as those approaching retirement may only use part of their funds to buy annuities. They may also look to the new annuity innovations. It will be interesting to see how insurers will adapt to the new environment and whether this will result in better value for pensioners as this should be the ultimate objective.