It’s a lack of supply rather than demand that could kill the annuity market, argues Sara Benwell

One of the biggest drivers of freedom and choice was the idea that people were buying poor value annuity products. Giving them more options, the government said, will allow them to access products that are right for them.

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It kind of makes sense, until you consider that a huge part of the problem was that people were failing to shop around. A problem that’s hardly likely to be solved by introducing more options.

It’s entirely unsurprising, therefore, to find that what’s actually happened is we’ve left consumers paralysed by choice. In both the drawdown and annuity markets, people are still failing to explore their options – leading to sub-optimal choices and yet more poor value for savers.

Research from Citizen’s Advice found that a staggering seven in ten people who have accessed their pension since new freedoms were introduced didn’t shop around for different products.

Shopping around for annuities should be a no brainer”

Andrew Pennie, marketing director at Intelligent Pensions commented: “Shopping around for the best retirement outcome is at the heart of pension freedoms and it’s disappointing that we are actually seeing a decline in the numbers of those shopping around in these early months of pension freedoms.

“Shopping around for annuities should be a no brainer to try and achieve the best possible rate and check whether you can benefit from an enhanced rate. It’s estimated that 60% of 65 year olds could qualify for an enhanced annuity yet the actual number that benefit from increased retirement income via an enhanced annuity remains disappointingly low.”

Tom McPhail, head of retirement policy at Hargreaves Lansdown, added: “Since the launch of pension freedom, more and more investors are arranging their income directly with pension providers, usually without taking advice. It is imperative therefore that everything possible is done to help them find the best possible deal.”

As the French say - plus ça change.

Unintended consequences

Unfortunately – one unintended consequence of the ‘freedom and choice’ legislation may actually worsen the situation. Due to concerns about demand for annuities, providers have started to reduce capacity or pull out of the market altogether.

More investors are arranging their income directly with pension providers, usually without taking advice”

For instance, Prudential has decided not to offer its annuities on the open market and in future will only offer them to existing customers. Meanwhile, the merger of Just Retirement and Partnership has further reduced the number of annuity providers on the open market.

McPhail said: “Demand for annuities has now stabilised, and has even started rising again in recent months. However, far too many investors are still missing out on the best income for their needs because they aren’t shopping around. Our worry now is that with fewer annuity providers available on the market, more and more investors may end up bypassing the shopping around process and simply buying an income from their existing provider.”

Annuity providers now available on the open market (source Hargreaves Lansdown)

1. Aegon

2. Aviva

3. Canada Life

4. Hodge Lifetime

5. Just Retirement

6. Legal & General

7. LV=

8. Retirement Advantage

9. Scottish Widows

10. Standard Life

Of course, it’s possible that having fewer providers will make it easier for people to choose. But past experience should tell us that any industry dominated by a few big players often spells bad news for consumers. You only have to look at the energy companies to see how important healthy competition is to ensure that people get the best possible value.

For most people an annuity is the right solution to provide some (if not all) of their retirement income. Unfortunately, as we know, annuities are unpopular. In part – this is because of factors such as the ‘what if I die early?’ question – but a big part will be the fact they are perceived as poor value as long as rates remain low.

This is a modern conundrum and the solution is not immediately obvious”

It’s hard to see how a dwindling number of providers will do anything to change that perspective. But unless there is sufficient consumer demand for the products, it’s hard to imagine the pool not shrinking further as insurers decide the game is not worth the candle.

This is a modern conundrum and the solution is not immediately obvious. A rebrand would help. We know what people don’t like about annuities and the elements that make them turn their backs on the products. But we also know that the vast majority of retirees want a secure income for life. We need to find a way to capitalise on the latter sentiment and create products that are appealing to consumers.

One solution could be a deferred product, where people secure their later years with regular income but capitalise on freedoms early on. It’s an idea that lots of people are talking about, but which we’ve yet to see appear in the UK market.

Another suggestion is to look at ways to safeguard a member’s money in the event that they die very young. This addresses the concern felt by many people that they could save for all those years yet lose the money overnight if they die a few weeks into retirement. Products that do this are starting to emerge but are not well-publicised, and most consumers don’t even know it’s an option.

Innovation in the annuity space is sorely needed, whether that’s a rebrand, banning the word annuities altogether or new product development. After all if – if the insurers build it, people may come. If they don’t – we run the risk of everyone running out of money.