Gilt yield reductions caused by Brexit may deter savers from buying an annuity and see their pension choice limited to drawdown, Aegon’s head of pensions has said.
This comes after a surprising buoyant annuities market in 2015. The Association of British Insurers reported that £990m was invested in annuities in second-quarter last year with £1.3bn taken as cash lump sums. By the fourth quarter, annuity sales had risen to £1.1bn, while £660m was taken as lump sums.
This uptick followed a stretch following pension freedom in which annuities were out of favour because they were considered less flexible than drawdown pension products.
However, annuities are set to face another change of fortune according to Aegon’s head of pensions Kate Smith. She argued they are likely to face another considerable drop in demand as a result of the weak monetary market following the Brexit vote.
She said: “Their worth will be hugely reduced meaning there will be fewer viable pension products for the mass market. There will be reduced choice for consumers.”
She argued that last week’s referendum result and the subsequent economic fallout will have a disproportionate impact on the market because the monetary economy is very weak.
Bank of England (BoE) governor Mark Carney has said that the Bank should introduce new monetary easing measures, primarily with quantitive easing – this has the impact of reducing the value of money.
She said: “It is also true that because the UK is a net importer, the weak pound will increase the price of goods and services meaning the fixed amount released by a standard annuity will be further reduced in value.
“This is particularly problematic for pensioners as they primarily buy fuel and food imports. These goods are particularly susceptible to price increases.”
Similarly, government bond yields tumbled to a record low post-Brexit, and 10-year gilt yields hit 0.93% at the end of last Monday. Gilts underpin annuities and meaning the value of the product has been further reduced.
Smith said: “The likely result is that economic circumstances will reduce choice for savers. At the moment they can choose between annuities and drawdown products but monetary weakness might further erode the worth of annuities. This will result in a lack of choice which goes against the ethos of pension freedom.”
She added: “Annuity protection is one alternative for savers, but it is costly, particularly if the pension holder dies in the early years of the contract.
“These contracts mean people take a financial hit early on and see the benefits further out if they live long enough.”
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