Annuities are back in fashion, but take up needs to be a long-term trend

Annuities are having a resurgence. Sales rose 17 per cent year-on-year during the last six months of 2022, 25,592 compared to 21,819 during the same six months of 2021.

In 2022 the total number of annuities sold was 46,620, from 44,191 the previous year and 41,284 in 2020, according to the ABI which said 2023 was proving to be a less turbulent year for the income-producing product.

The ABI said the figures were bolstered because more people chose to switch provider. Much has been made of trying to make consumers aware of the open market option but it appears the message is finally getting through as for the first time since 2016, more than 10,000 people bought an annuity from a different provider to their pension savings provider.

Exercising the open market open accounted for 64 per cent of sales and totalled £847m.

Rising inflation is also driving sales as sales of escalating annuities, which provide an income that increases every year, grew by 23 per cent. It does appear that savers are trading security for flexibility.

Return of the annuity

Damon Hopkins, head of DC Workplace Savings at consultancy Broadstone, said the return of the annuity was "the retirement story of 2022". "Sales increased as pension savers took advantage of the spike in interest rates and gilts to secure fixed retirement income at their highest level in years.

 “The acceleration in Q3 and Q4 chimes with ABI data that suggests annuity sales are now starting to see significant increases as savers reaching retirement are attracted to the idea of securing income at a lower cost, given the rise of annuity rates as interest rates spiked over that period.

 “As it stands currently, pension savers with a £100,000 pot looking to buy an annuity are likely to generate thousands of pounds more annual income compared to a couple of years ago which is clearly driving the higher demand for annuities.

 “When it comes to securing a good standard of living in retirement, a lot of scrutiny is focused on contribution rates and investment returns, but decisions made at the point of decumulation can be vital in maximising savers’ pots and may be worth significant sums.

“When it comes to annuities, simple steps like shopping around and disclosing medical conditions can be key to making hard-earned savings work harder and getting a better rate.”

More annuities please

The hike in sales is not enough to allay fears that some consumers are missing out. The Financial Services Compensation Scheme said around 19 million people aged 50 or over in the UK were still not considering annuities. 

Despite annuity rates increasing significantly since the start of 2022, when the survey was conducted in March 2023, only two in 10 said improved rates make them more likely to buy one.  

The FSCS said its research highlighted a significant mismatch between UK adults aged 50 and over who were unwilling to take risks when it came to their retirement savings and their knowledge about annuities as a retirement product providing a guaranteed income.

It said its findings highlighted a greater need for better education, and the importance of getting regulated advice, as well as the pros and cons to all options available for their pension pots, so they can choose the right products that align with their personal risk appetite and retirement choices. 

Despite more than one-third those surveyed saying they were unwilling to take risks because they were worried about not having enough money to last the duration of their retirement, more than half of this same group of people admitted they had a vague or lack of understanding of annuities. Even when asked whether improved annuities rates would make the product more attractive for them, fewer than three in 10 agreed with this statement. 

Those UK adults aged 50 or over that are risk-averse list the following as some of their top concerns about annuities: not knowing if annuities are right for them (29 per cent), fear of provider going bust (26 per cent), not understanding how annuities work (25 per cent) and a lack of protection if something goes wrong (25 per cent).  

Annuities that are provided by UK-regulated insurers are fully protected by FSCS, so the scheme can pay compensation to eligible customers with no upper limit if the annuity provider goes bust.  

Lila Pleban, chief communications officer at FSCS, said:  “It is not surprising that most UK adults aged 50 or over are risk averse when it comes to their money. At this stage of people’s lives, they are likely to choose safety and stability over volatility and uncertainty. However, what is surprising is that many people are not willing to even consider an annuity because they don’t fully understand what it is.  

 “There are pros and cons to every option out there for your pension pot, whether you choose a guaranteed income or a more flexible drawdown approach, and retirement choices are very personal. Accessing regulated financial advice or free and impartial guidance from services such as MoneyHelper may help people to better understand the money and pension choices available to them.  

 “It is clear from our latest research that those aged 50 and over must have access to the knowledge and tools they need so they can choose the right retirement product for them. That’s why at FSCS we are committed to empowering and educating consumers, so they feel confident about the decisions they make when it comes to their money.”