Budget reforms 'could still leave room for annuities'

The note is being launched at an exclusive event for PPI Supporting Members, hosted by The People’s Pension, where Treasury Minister, David Gauke MP, will be outlining the Government’s proposals for how savers access their Defined Contribution pension pots at retirement, as announced at Budget 2014.

The briefing note finds that, while the demand for annuities is expected to fall in the short-term as a result of the new freedoms and flexibilities being announced, improved annuity products may still prove to be an attractive retirement income solution for some groups in future.

Mel Duffield, PPI Deputy Director, said:

“Since the Budget announcement there has been a lot of uncertainty about the outlook for the UK annuities market, with the Treasury figures suggesting that take-up of annuities amongst retirees with DC pension pots could fall from around 75% now to 50% post-April 2015. Other commentators have made more pessimistic predictions.”

The PPI’s review of international retirement systems highlights a number of factors that affect the demand for annuities across different countries which will be relevant to how the market develops in the UK. These include underlying cultural attitudes and the appetite for a secure and guaranteed source of income in retirement; the structure, variety and perceived value of other retirement income products on offer in the market; the timing and framing of the decisions about how to allocate pension savings; and the perceived attractiveness of the annuity rates on offer.

Mel Duffield added:

“In Switzerland, where unlimited access to private pension saving is allowed and annuity rates are seen as good value, around 80% of DC savings are still put into lifetime annuities at retirement. And in Denmark, where decisions in some voluntary pension saving vehicles on how to allocate savings are taken well ahead of retirement, around 85% of voluntary pension savings are being allocated to either lifetime or fixed-term annuities.

“In other countries, such as Australia, Canada and the US, lifetime annuities play only a small or negligible role in the market. However there are growing concerns in these countries that retirees are not well enough informed about their retirement needs and are running down their pension savings too quickly.”

The PPI briefing note also argues that the industry and employers have a pivotal role to play in designing simple, understandable, and good value for money products that savers can use to access their DC savings at and during retirement.

The analysis suggests that innovations in the market, for example annuities that can also provide elements of insurance for health, disability or long-term care needs during retirement, and deferred annuities that can be combined with income drawdown products to provide insurance against very long life, could provide features that consumers value as the industry responds to the new flexibilities in the Budget.