Mike Morrison is not about to start singing but he fears before too long we may be looking back at the annuity market and agreeing ‘You don’t know what you’ve got till it’s gone’.
Even if she was not singing about annuities, Joni Mitchell made the point perfectly, when she sang: “You don’t know what you’ve got till it’s gone.” In a few years’ time, will we look back fondly on our annuity market or will we regret what will have passed us by?
In 2015, pension freedom had a significant effect on the use of annuities by individuals wishing to use the new flexibility. The annuity market immediately fell and, since then, we have seen considerable changes, with a number of companies withdrawing themselves.
According to recent press reports, six providers have pulled out of the open market since the pension freedoms were announced – not including LV=, who recently announced it is proposing to withdraw from the enhanced annuity market.
The providers and the dates they left the enhanced annuity market are:
* Reliance Mutual (July 2014)
* Friends Life (April 2015 – merger with Aviva)
* Partnership Assurance (April 2016 – merger with Just Retirement)
* Prudential (June 2016 – still offer in-house annuities)
* Aegon (September 2016 – in-house annuities through Legal & General as ‘preferred annuity supplier’)
* Standard Life (November 2016 – still offer in-house annuities)
Among the providers still in the market meanwhile are:
* Aviva (standard and enhanced)
* Canada Life (standard and enhanced)
* Hodge Lifetime (standard)
* Just Retirement (enhanced)
* Legal & General (standard and enhanced)
* Retirement Advantage (standard and enhanced)
* Scottish Widows (enhanced)
In a rate-driven market, can we afford to lose so many companies? Just imagine what would happen if the number of companies wanting to remain in the annuity market became even smaller.
In the process of losing annuity providers, we lose some of the potential benefits of shopping around – both for standard annuity rates and for the coverage and competitiveness of enhanced annuities.
Although pension freedom has taken centre-stage, much of the research done by auto-enrolment providers has shown a real demand for a component of guaranteed income in retirement planning – and this is only likely to grow.
That demand could be a requirement for a minimum income alongside drawdown in a blended approach and, if we enter a time of enhanced investment volatility, we could see some reversal in the demand for drawdown to blended products and annuities.
Now, without stating the obvious, any underestimations of mortality risk will take time to emerge and it is the one variable that can do real damage to a drawdown plan – particularly as research tells us we will underestimate how long we will live for.
As an example, take these statistics from Age UK’s October 2016 report, Later life in the United Kingdom:
* 11.6 million people are aged 65 or over
* More than 1.5 million people are aged 85 or over
* There are more people aged 60 and above than there are aged under 18 (that is to say, 15 million)
* The number of centenarians living in the UK has risen by 72% over the last decade to 14,450 in 2014
* UK life expectancies at age 65 are 85.9 years for women and 83.4 years for men (Life expectancy increased by 1.5 years for men and 1.1 year for women between 2006/08 and 2011/13)
* By 2040, nearly one in four people will be aged 65 or over
* The proportion of the population aged over 75 is projected to double in the next 30 years
* Nearly one in five people will live to 100, including 29% of people born in 2011
Unexpectedly living to such an age can do serious damage to an investment portfolio at a time when more certainty and less risk are key.
Yet one of the great features of an annuity was the guarantee of income and the guarantee of a specific amount in the bank account at the end of the month.
Pension freedom has undoubtedly had an effect on annuities. Looking at it in a positive light, we have the offer of flexible income, greater investment and more flexible benefits on death. On the other hand, we now have less choice of annuity provider.
We also have a situation where annuity providers are not able to have as wide an exposure to the pool of lives they used to – and therefore the mortality exposure they used to. As such, are they being selected against, getting only those lives feel they will outlive the average?
I’ve said it once and I’ll say it again – ‘you don’t know what you’ve got till it’s gone.’
Mike Morrison is head of platform technical at AJ Bell
The post Mike Morrison: When it comes to annuities, Joni Mitchell was right appeared first on Retirement Planner.