Analysis of over 150,000 advised single life annuity cases found that annuity sales recovered somewhat in the last two months of the second quarter, after falling to their second lowest level on record in April. Annuity demand in June was 32% higher than in April. Activity also rose on an annual basis, climbing by 14% compared to June 2014.
The immediate impact of pension freedoms saw demand in April fall 7% compared to March 2015, and by 30% year on year. Since 2012, demand had only been lower in December 2014. Despite the improvement in May and June, activity remains well below the level seen before the pension flexibilities were announced, and 36% below 2013 levels.
Rising annuity rates played their part in the increased demand in May and June, following April’s slump. The average rate for a single life annuity reached a new six month high in June 2015. It now stands at 5.09% - 23 basis points higher than rates seen in March (4.86%), as improving economic data and an increasing likelihood of rate rises impacted gilt yields.
Alongside improved rates, average pot sizes have risen. Overall, the average pot at the end of Q2 stood at £67,504, representing a 5% increase compared to March and a 3% increase compared to the same month in 2014.
Due to the more positive outlook across both rates and average pension pot sizes, average incomes for those choosing to annuitise also rose by the end of the second quarter. In June the average income stood at £3,438, 10% higher than the average income secured in March 2015.
Shopping around for the best deal can save retirees thousands of pounds over the life of an annuity, given the gap between best and worst rates on the market. This gap is increasing, rising to 81 basis points in June, up from 78 basis points at the end of Q1. The average best rate for June 2015 stood 5.4%, compared to the average worst rate of 4.6%. For the average pot size in June, the difference between best and worst rates equates to £549 per year in income and £13,713 over a 25 year retirement.
Reduced awareness of enhanced annuities also remains a cause for concern. By the end of March sales of enhanced annuities accounted for one in three annuities yet by the end of June this had fallen back to 17% of all annuitants.
Additionally, there has been an increase in equity release in the second quarter of 2015. Sales of equity release products via an adviser were 19% higher in the second quarter of 2015 compared to the first quarter in 2015, and 22% higher than levels seen this time last year.
Dave Miller, Executive General Manager, Commercial at IRESS, commented:
“Pensions Freedom Day hit annuity activity hard in April, as those at retirement rushed to explore alternative options. In the months that have followed, the mini-bounceback points to demand stabilising, buoyed by improving rates. However, with further changes in the market on the cards – not to mention new investment and hybrid products likely to launch – we have not seen the end of disruption and innovation in the retirement market.
“For those considering annuities, a rate rise bodes well, and as we head towards a more normal interest rate environment, we should see this trend continue in the longer-term. This will underpin demand from those looking for a form of guaranteed income.
“However despite rates rising, it is clear that shopping around remains a key issue for consumers, given the growing gap between the best and worst rates. On top of this, there is still more work to be done on promoting consumers’ eligibility for enhanced annuities. Enhanced income as a result of a medical condition is a key attribute for annuities, and improving consumer awareness of this will be crucial to the long-term take-up of annuities.
Jim Boyd, Corporate Affairs Director at Partnership, commented:
“IRESS data suggests that while the overall demand for annuities has grown by 32% to the end of June (since March) the proportion relating to enhanced annuities illustrations has fallen back to 17% [Q4 2014 – 17%]. The overall effect of significant growth in illustrations and a smaller decline in the proportion relating to enhanced annuities implies that enhanced annuity illustrations have taken a modest fall.
“The relationship between illustrations and future sales is complex with factors like multiple illustration requests per customer and conversion from illustration to sale influencing the overall level of sales. Many people requesting annuity illustrations will be planning decisions months and often years in advance. Some will be obtaining illustrations solely for the purpose of advising on income drawdown. For these reasons we believe it is too early to be able to draw conclusions from illustration data during this period of change. Once the freedom and choice changes have bedded in and customer behaviour has stabilised, we expect illustration data to return to being a more useful indicator.
“Enhanced annuities remain an important part of the adviser tool kit. Indeed, for an average sized pot [£69,120] a smoker could secure an annual income 7% higher than an income of a non-smoker [£3,680]. Not only do people need to shop around to get the best deal but they need to ensure that if they are eligible for an enhanced product, they choose the best in show! There are 139 basis points between the best and worst products for smokers so speaking to an adviser who can provide independent financial advice is vital.”
