Is the annuity market dead? (date dependent Nov 2020)

According to FT Adviser, by 2018, 88% of the products sold to provide retirement income were not lifetime annuities. This was a reversal of the retirement income market before 2015, so it is a reasonable question to ask.

The vast majority of investors were sold, or chose, a flexi-access drawdown solution; this was the result of the great Pension Freedom Act back in 2015, which would free us all of the shackles of poor quality annuities.

There is some truth in this: prior to 2015 the UK was the world’s largest annuity market, and the second largest was Chile. But there was a reason that buying an annuity was compulsory, and that was because it ensured your income never ran out – no matter how long you lived.

When given the choice of a guaranteed, never ending, inflation proofed income that continues to your spouse, or a risk based income that depends on market returns for success, the vast majority of people would buy the former if the starting amount was the same. Why take the risk if you don’t have to?

Flexi-access drawdown has advantages (flexible income, real investment returns and inheritance) but never ending income is not one of them. It is also true that one of its less promoted advantages is the continued option to buy an annuity at any time.

The reality of life is that as we get older, we become one of the lucky ones that made it so far. This no doubt gives some comfort, but it also raises concerns and most older people are more risk averse. The question then arises: is it appropriate for those people to still be relying on the stock market for their income?

At 65 an inflation proofed annuity which pays 100% to a spouse is unlikely to provide an annuity income better than 2.5% of your capital. Compared to this a sustainable drawdown income of 4% looks pretty good.

By the time you’re 80, the rate is 4.7%, and at 85 its 7.2%, so you can see the pattern – as mortality begins to bite, the lucky ones can access better guaranteed rates. By the time you’re 90, the guaranteed income from an annuity is more than the drawdown should be giving you, even if it has increased with inflation every year.

And remember, government interest (gilt yields) is historically at its lowest point on record. When this interest rate increases, annuity rates will get better, so the age to buy annuity will get younger.

So: is the annuity market dead? No, it just got pushed 15 years into the future.

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