Auto-annuity purchase is dead – here's how providers will respond

People can take their 25 per cent tax-free cash and leave the balance invested without having to secure an income with the remainder.  

In countries without mandatory annuity purchase, fewer than 10 per cent of retirees choose to annuitise.  

Longevity is only one of the retirement risks people face

Annuities can fulfil some retirement requirements, but not all. Previously, most retirees just bought standard single-life level annuities, at increasingly poor rates as gilt yields fell following quantitative easing.  

This completely irreversible purchase sought to protect them against running out of money if they lived to advanced old age, but longevity is only one of the retirement risks people face.  

They had no inflation protection, no cover for a partner, no help if they became ill or needed care, no legacy to leave on early death and no chance to benefit from strong investment markets or future rate rises – although the converse of that is the fund will not be damaged by investment falls.

This is rather like only insuring your house against fire. If it burns down, the insurance pays out, but with flooding or burglary, there is no protection. 

Annuity providers may well refocus their selling efforts on bulk annuities to aid DB derisking

Annuities will still form part of pension planning – especially for those who want certainty of future income and can accept a low return in exchange for longevity insurance – but perhaps from later ages, and not with their entire fund.  

Instead of standard annuities there will be more joint-life products, with individual underwriting for health issues. Delaying annuitisation to a later age allows flexibility to adjust to changes in individual or market circumstances, rather than setting lifelong income according to earlier health with no chance to reflect future illness. 

Annuities that offer a ‘surrender value’ or perhaps with non-linear payout profiles might be of interest.

Retirement income needs are often U-shaped, with high spending in the first few years, then a less active lower-spending phase and finally much higher spending for health or care needs.

Third-way annuities and lower-cost, mass-market drawdown products should prove popular, enabling people to benefit from good markets, or future rate rises, while offering downside protection with capital or income guarantees.

Spreading risks in a diversified portfolio can allow pension savings to protect against more retirement risks than before.

Finally, although the individual annuity market will probably shrink substantially, there may be increased demand from defined benefit pension schemes. Annuity providers may well refocus their selling efforts on bulk annuities to aid DB derisking.  

With hundreds of billions of pounds of pension assets, DB scheme demand could offset reduced sales of individual annuities.

Ros Altmann is an independent pensions expert