Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Annuity market slump brings shopping around to the fore
There is a worrying trend emerging in the UK annuity market.
Plunging annuity sales have seen insurers review their ongoing commitment to the open market. Many providers have stopped selling annuities including Standard Life and Prudential.
The launch of the pension freedoms in April 2015 sparked a steep decline in guaranteed retirement income sales for insurers.
Drawdown – a more flexible option where your money remains invested – has become the automatic option for most savers.
In the three months immediately after the freedoms launched just 12,418 annuities were sold. In the same period in 2013, that figure was 89,896.
Next to go?
LV= earlier this month said it may pull out of the ‘enhanced’ annuities market. That is the domain of guaranteed income products which can pay a higher rate based on health factors.
For example, someone who has diabetes or smokes 30 cigarettes a day might get a higher annual income because the insurer expects them to live less long.
This matters because healthy competition forces providers to compete fiercely for your business, usually through the rate they offer.
The retirement income market also needs healthy competition between products.
For many, the choice between annuity and drawdown – guaranteed income versus flexibility – will be a tough one. A strong, well-functioning annuity market will keep drawdown providers’ collective feet to the fire, ensuring competitive pressure is applied across the market.
Furthermore, many investors who prefer the control and tax planning benefits offered by drawdown might still want to secure some of their income by buying an annuity with a portion of their fund.
Shop around for best deal
Anyone planning on buying an annuity must shop around to get the best deal. The Government has abandoned plans to allow people to sell their annuities, so once you’re locked in, there’s no getting out.
In drawdown, providers’ propositions vary hugely on things like price, investment choice and service. The good news is that you aren’t locking into a permanent contract – if you aren’t happy with your provider for any reason, you can switch to another relatively easily.
Nevertheless, it’s sensible to review both your investment portfolio and your choice of drawdown provider as often as possible – and at least once a year – to make sure you aren’t missing out on a better deal elsewhere.
AJ Bell Analyst