Changing times call for different measures

The results of the latest Retirement Planner Inquiry, into how recent reform will affect the annuity market, are in – Helen Morrissey goes through them

The rate of retirement ­income reform over the past 12 months has been rapid and will enable retirees to access a new range of products and retirement income strategies. A major trend we are likely to see will be an increased use of income drawdown – but where does this leave the annuity market?

Annuities have monopolised the retirement income market for many years – will we see this ­demand tail off or will we see changes to how they will be used? In this Retirement Planner Inquiry, we aimed to get adviser feedback as to how the ­annuities market will progress over the ­coming years.

We distributed the survey via email to the Retirement ­Planner readership, with 207 readers submitting a response. The first question we asked was whether ­advisers believed the removal of the Age 75 rule would affect demand for annuities in the future. More than half of advisers (55%) said they thought demand would remain the same, with 38% ­saying they thought demand would ­decrease. However, a small number (7%) believe these changes will actually result in increased demand for annuities (see question one).

Increase in purchase age

A further change we expect to see is in the age at which people ­purchase an annuity. Considering that there is no effective compulsion to purchase an annuity by 75, will we see people choosing to delay making this decision? According to our survey, it seems this would very much be the case.

Of those who supplied a ­response, 59% said they ­believed the average age for annuity ­purchase would increase. More than a third (36%) said they thought it would remain the same, while 5% thought the average age would actually decrease (see question two). When explaining why they thought the average age might ­decrease, one adviser said that concern over ­decreasing ­annuity rates could influence people to ­decide to purchase earlier. ­However, the trend towards ­working longer was given as a ­major reason why the average age for annuity purchase could rise.

Different types of annuity

So if people choose to delay their annuity purchase for longer, could they also be looking for ­different things from their ­annuity as well? The industry has seen real ­innovation in the annuity ­market over recent years, with the ­development of asset-backed and fixed-term ­annuities – could we see an increased demand for these alternatives, too?

Only 16% of survey participants thought that there wouldn’t be an increase in demand for these kinds of ­annuities, while a further 59% said they thought demand for these types of product would increase (see question three). When it came to working out where this increased demand would occur, asset-backed ­annuities came out top, with 13% of participants saying they thought these products would attract a wider audience. Only 8% thought the same over fixed-term annuities.

Other advisers said they ­expected to see drawdown ­increase its share of the retirement income market, while others said they expected to see their clients adopt more diversified investment strategies in their retirement.

Another major trend that is ­expected to develop is using ­income drawdown and annuities side-by-side. For instance, a client could choose an annuity to fix a base rate of income before putting the rest into income drawdown.

Survey participants agree that this is likely to be the case, with more than three quarters (78%) saying they expect to see changes in how annuities are used in a retirement planning strategy. Only 9% said they did not expect to see a change in how annuities are used in future (see question four).

Who does the reform affect?

While the recent reforms have ­provided much needed ­flexibility within the retirement income market, there are concerns that not enough is being done to help those with smaller pension pots.

With the average pension pot remaining at about £27,000, is there anything more that can be done to help? Unfortunately, almost a third (29%) of survey participants said they thought no more could be done to help those with small pots, though 59% said more could be done to help (see question five).

Of those who thought that more could be done, some felt more assistance could be delivered via simplification of rules and product development, while others said triviality limits need to be increased.

Overwhelmingly, participants said more could be done for those with smaller pots through increased awareness of the open-market option. This was borne out in the results of the final question – should the open-market ­option become the default choice at retirement?

A massive 82% of those who responded to the question said they did feel the open-market ­option should be made the default, with only 13% saying they did not believe this should be the case (see question six).

Question one: How do you think the removal of the Age 75 rule will affect demand for annuities?   
7%     Demand will increase
38%     Demand will decrease
55%     Demand will stay the same

Question two: Do you feel the average age for annuity purchase will change?
5%     It will decrease
36%     It will stay the same
59%     It will increase

Question three: Do you think this increased flexibility will also spark interest in different types of annuities – i.e. asset-backed or fixed-term ones?
59%     Yes
16%     No
25%     Don’t know

Question four: Do you expect to see evolution in how annuities are used – i.e. splitting retirement income pot between annuities and income drawdown?
78%     Yes
9%     No
13%     Don’t know

Question five: Retirement income reform tends to benefit those with larger pot sizes. Do you feel more can be done to help those with smaller pots?
59%     Yes
29%     No
12%     Don’t know

Question six: Do you feel the open-market option should be made the default choice at retirement?        
82%     Yes
13%     No
5%     Don’t know