Annuity demand drops further 27% in Q4

Annuity demand dropped in the final months of 2014 as consumers held back from decision making until after April’s reforms, according to the latest At Retirement Report by IRESS.

Related topics:  Retirement
Rozi Jones
27th January 2015
pension nest egg annuity retirement old people

Analysis of data from over 150,000 advised annuity cases has found that sales of single life annuity products via financial advisers fell by 30.1% in 2014 compared to 2013. Demand was 26.7% lower in Q4 2014 than the previous quarter, as the trend of consumers delaying decision making until April was accentuated by the impact of the festive break. As a result, December saw demand fall to its lowest level in at least two years.

Falling prospective incomes have also played a role in demand slowing, with the average rate for a standard single life annuity falling to 5.17% in December – the lowest since June 2013. Rates have broadly trended down in the year following their peak of 5.45% in January.

The average annuity pot size also fell in the final quarter, standing at £58,455 for December, down by 19% from September, the year’s peak. However, despite the short-term decline, it was 1.6% higher than the average pot of £57,535 in December 2013. In total the average annuity pot size in 2014 was £61,155 – 5.5% higher than in 2013, as many of those with the smallest pots unlocked them rather than annuitising, following the Budget.  

With rates and pot sizes falling at the end of the year, the average annuity income secured in December fell to £3,019, down by 3.7% year on year.

Dave Miller, Executive General Manager, Sourcing at IRESS, commented:

“It’s clear that many consumers are adopting a ‘wait-and-see’ approach, and delaying making decisions around their retirement income, opting to drawdown, or are waiting to cash out more of their savings. Providers, too, are waiting with bated breath for April, which we envisage will be a catalyst for innovative new, flexible product suites. In turn, as competition heats up – among annuity providers as well as those with investment products - this could support annuity rates.

“While annuity demand naturally suffered in 2014, following the Government’s announcement and historically low rates, it is still an important component of retirement planning. As retirees look for varied and flexible options to match their needs, guaranteed income, in some form or another, will be a crucial financial guard against increasing longevity.”

In 2014, the average difference between the best and worst rate available for a standard single life annuity was 72 basis points, with the average best rate standing at 5.65% compared to an average worst rate of 4.93%. This gap was equivalent to £444 in income per year for the average pot – 12.8% – and would equate to a difference of more than £11,100 over a 25 year retirement.

Enhanced annuity take up fell in the final quarter, with just 17% of annuitants securing an enhanced product, compared to 29% a year ago. For those with medical conditions, enhanced products can generate a greater income in retirement. For instance, the average rate for a single life annuity for smokers is now 5.62%, 0.45% higher than for non-smokers – representing a difference of 8.7% in annual income for an annuitant with the average pot size.

The quarterly report also shows that demand for equity release products grew strongly in 2014. In the full year, sales of equity release products via an adviser were 8.1% higher than in 2013, with demand in the final quarter of the year up 12.9% annually.   

Dave Miller said:

“Value for money has been central to the annuities debate in 2014. The FCA’s findings in December highlighted that for those whom annuities are appropriate for, comparing market rates is central to achieving value for money. But securing the best outcome goes beyond a simple rate comparison. Firstly, consumers must be aware of their eligibility for products such as enhanced annuities. Secondly, as new hybrid or investment products hit the market, consumers will also need to compare prospective returns across all product types when shopping around.  

“Simple guidance through Pension Wise, as well as potentially renovating the wake-up packs that consumer approaching retirement receive will help, but professional financial advice will be an increasingly important keystone in retirement planning.”

Mark Stopard, Head of Product Development at Partnership, added:

“While today’s report was naturally going to show that the annuity market had been impacted by the upcoming Pension Freedoms, it does highlight some positive trends. Indeed, enhanced annuities accounted for 20% of sales in 2013 but had risen to 28% in 2014 which suggests that an increasing number of people are recognising the value they can provide.

“However, every enhanced annuity is not created equal. The IRESS analysis suggests that in December, the difference between the best and worst average annuity rate for smokers stood at 140 basis points – with the best average rate 6.14%, a far larger variation than for among standard annuity products.   This clearly shows how vital it is to shop around to make sure that not only are you getting a better value product but you are getting the best value product for your situation.”

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