Annuity demand expected to resurge

The freedom and choice reforms have profoundly changed the way savers take their savings at retirement, but data released by the Association of British Insurers this month showed annuity sales slowly beginning to grow.

In its latest analysis, entitled ‘Deeper perspectives: The changing UK retirement income market’, research provider Spence Johnson said that while annuity providers are predicting 75-85 per cent drops in annuity sales from 2013 levels, sales could recover 8-9 per cent each year between now and 2024.

Source: Spence Johnson

The report said: “After 2015 the weight of money coming through the pensions market as it transitions from defined benefit to defined contribution means we believe sales of individual annuities will return to growth rates of 8 per cent a year.

“At this rate, however, by 2024 annual flows will remain below 2014 levels and well below 2013 annual sales.”

Growing but muted demand

Robert Holford, senior consultant at Spence Johnson, was quick to add he was “not predicting a return to the annuity markets of the past”, but that research had shown demand was still strong for products that could offer certainty and security.

“I do think there will be demand, they will be part of the product mix,” he said. “If you want to know exactly how much you’re getting each month, annuities are the way to do that.”

Spence Johnson said the composition of annuity sales was also likely to change, with a higher proportion of individually underwritten enhanced annuities being sold.

The report added: "In addition, product development in the annuity space could significantly impact annuity demand.”

This was borne out by the experience of retirement product provider Partnership, which saw increased interest between April and October this year.

Mark Stopard, head of product development at Partnership, said: “In September/October, we have seen quotes for enhanced annuities increasing by approximately a third compared with April, when the pension freedoms were implemented.

“This seems to suggest that while annuities are battling perception problems, ordinary consumers are also interested in the benefits they can offer.”

It recently launched an ‘enhanced retirement account’, which aims to combine “the benefits of an annuity with the flexibility of drawdown and some potential for growth”.

Stopard said: “These hybrid products will become more popular as people wrestle with their choices at retirement and look for simple solutions to complex problems.”

Roger Mattingly, director at independent trustee company Pan Trustees, said the peace of mind that goes with a secure income for life will “come back into vogue”, but added: “I’d be surprised if that’s already happening.

“I wouldn’t be surprised if, in the next three years, there’s a reversion to a more normal level of annuity purchase. I could see them coming back to a more measured level.”