Analysis: Many savers have been reluctant to purchase an annuity following the government’s introduction of freedom and choice in 2015, but should they be nudged to reconsider their options?
Data from the Association of British Insurers revealed that annuity sales decreased at the beginning of 2016, with £950m invested compared with £1.1bn in the final quarter of 2015.
If it’s a properly priced annuity, you are better off with an annuity, always
Pablo Antolin, OECD
In addition to people wanting to take advantage of freedom and choice, low interest rates and a poor understanding of how annuities work have been cited as some of the reasons behind savers’ suppressed appetites for a guaranteed income product.
Better understanding needed
But Pablo Antolin, principal economist in the OECD’s private pensions division, is convinced annuities are a better product than drawdown or cash: “If it’s a properly priced annuity, you are better off with an annuity, always.”
For Antolin, a lack of communication with regard to annuity pricing is one of the main factors driving people away from this type of retirement choice in the UK.
He highlighted how low interest rates and increasing longevity have affected annuity rates, noting that many people “immediately think somebody’s ripping [them] off” when they see other annuitants getting more money than them.
“Politicians and the industry never explain to them in a way that they understand that the world has been shifting towards low interest rates,” and when it comes to pricing annuities, “that’s the way it works. Nobody’s ripping you off”, Antolin added.
This is why for Antolin it is important to inform people from the beginning about how an annuity works. If any regrets kick in, “no amount of information is going to address the problem”, he said.
Hugh Nolan, president of the Society of Pension Professionals and director at consultancy Spence & Partners, also cited a lack of trust, arguing there has been “a general move in society where people are more mistrustful about organisations like insurance companies”.
Nolan agreed that annuities should have a big role to play in retirement choice. He said that what people want in retirement, when asked, is a regular income, payable for the rest of their life.
But when the word ‘annuity’ crops up, consumers say they have heard annuities are “a rip-off”, he said.
Nolan added: “One of the big issues with annuities being seen as bad value was that when people died [their families] didn’t get any money back.”
Many savers do not understand that “that’s perfectly fair” because “the money they lost out on was paying for the people who live too long… that insurance element of it is the beauty of an annuity”, he said.
Jon Dean, senior consultant at Altus Consulting, also blamed a lack of awareness. “Most people on the street probably still don’t know what [an annuity] is,” he said.
He said there is a general mistrust of the finance and pensions industry, particularly following the press coverage of high profile pension scandals in recent years.
“It doesn’t matter whether it’s a company-funded pension scheme or a life insurance company. People wouldn’t actually trust anyone these days to follow through on the guarantee,” he said.
Consumer protection is key
With a decreasing number of people wishing to buy an annuity, how do experts think the market will develop?
Nolan emphasised the need for a “more flexible annuity-like product, which gave some protection against longevity but was also linked to investment markets”.
FCA final rule changes unlikely to help, experts say
The Financial Conduct Authority has published its final rules on requiring firms to provide an information prompt to consumers to improve shopping around in the annuity market, setting out a number of changes, including an enhanced annuity warning.
He also highlighted the benefits of rebranding annuities. “You call it something different, you explain what the benefits are to people, and they should fly off the shelves,” he argued.
Consumer protection is also crucial for the future of annuities. The Financial Conduct Authority recently published its final rules on requiring companies to provide an information prompt to consumers to improve shopping around in the annuity market. One of the changes related to greater awareness of enhanced annuities.
Antolin said the introduction of enhanced annuities is “one of the best ideas that has ever been developed”. It is “something that a lot of people are thinking about developing in other countries, and I really hope it will develop”, he said.
