Just when you thought things couldn’t get any worse for annuities, the latest reports talk of further blows to the much maligned insurance plan.
Moneyfacts and the newly released Annuity Treasury Report show that annuity rates have fallen by at least 2.7% in the last 3 months, depending on the size of the pension pot.
Only last month the ABI reported that compared to the first quarter of the year, annuity sales had fallen by a third during the second quarter, brought about by the government’s radical plans to reform the pension market.
Despite this, interestingly LV reported last week that their annuity sales were actually up 6% in the first half of the year, but they were one of the first companies to launch a 1 Year Annuity product to capture those who needed an income, but didn’t want to commit themselves long term until the new rules are applied. As they say, it’s the early bird that catches the worm!
Speaking of the further drop in annuity rates, Richard Ealing, Head of Pensions at Moneyfacts said, "The pension proposals announced in the 2014 Budget by the Chancellor aimed to unleash greater freedoms in how retirees access their pension pots, but for those still looking for the security of an annuity, they also seem to have inadvertently lowered the incomes payable."
The average standard annuity rate for a pension pot of £10,000 fell by 2.7% giving a return of £521, with rates on a £50,000 pot falling by 3%, yielding a sum of £2,799.
Enhanced annuity rates which are paid to people with illnesses who are expected to have a shorter life expectancy also took a hit, but to a lesser degree.
So what does all this mean?
My view is that whilst this is undoubtedly unsettling, given the forthcoming changes it is inevitable that there will be some fluctuation, so we shouldn’t read too much into where the annuity market is right now; after all, insurance companies have made millions from annuities so whilst their margins may have been severely slashed, I am sure that we will see a plethora of new products in the run up to April 2015 when the new rules are implemented.
The pension changes are potentially life changing for many, giving access to sizeable pots of money that have never previously been accessible. Some of course will take the money and run however providing the insurance companies produce attractive annuity products and market them effectively, I see no reason why annuities should not prevail.
Interestingly, based on today’s available products, Hargreaves Lansdown, the leading pension experts, has found that up to 12% of people, in a recent survey, with defined contribution pension savings plan to do so.
One thing is for certain though; whether you are in the market to buy an annuity now or next April, the same rules apply. Always shop around for the best annuity that fully suits your needs and take advice from the experts.