Just when you thought annuities were unloved and gathering dust in your product range – a tired old offering merely plodding along for investors looking for a safe bet – the past few months have seen an explosion of excitement in the market.
Self-invested personal pensions (Sipps), bulk buyout and the fledgling ‘third-way’ annuities may have been attracting the column inches of late, but annuities are edging their way back into the conversation.
First up, the rates. While most headlines are sympathising with mortgage holders as the base interest rate stays at 5%, people looking to retire are quietly rejoicing.
According to Hargreaves Lansdown, annuity rates are at a six-year high: 9% up on February and 14% ahead of July 2006.
Continuing with the recession theme, the annuity’s cousin – income drawdown – is getting a raw deal at the moment.
The recent falls in the stock market mean many investors in drawdown schemes, which often have a high exposure to equities, are facing a sharp drop in their monthly income.
Good news for annuities then, as some investors switch from drawdown into an annuity to save the day.
On the politics front, Lord Oakeshott, Liberal Democrat treasury spokesman, has been keeping annuities on the agenda in the House of Lords. Last month, he called on the government to allow people to delay the purchase of an annuity by 10 years to age 85.
Finally, we’re seeing some long overdue innovation and sophistication coming from the providers themselves. Although many of them have put their best heads onto ‘project third way annuity’ as they eye up the best way to break into the market, they have also been revolutionising the way they determine annuity payouts.
Last year, Legal & General started to use postcodes as an extra factor in assessing longevity. Norwich Union is implementing a similar postcode-style system for its customers from November.
And now Legal & General has announced it will run a pilot scheme in September, in which occupation and body mass index could be used to determine how long a pension holder is likely to live and the resulting payout.
So it really is a hectic time for the old annuity product, and sales have been growing nicely too.
According to figures from the ABI, the number of new contracts sold blossomed by 18% from 2006 to 2007 – 367,000 were sold in 2006, while 433,000 were shifted last year.
The number of contracts sold in Q1 this year was slightly down on the Q1 2007 figure – 106,000 versus 110,000 – although the premiums swelled from £2.6bn in Q1 2007 to £2.7bn in Q1 2008.
The facts and figures
This is the first general annuities survey to be published by PM. Eleven companies responded, all with quite different offerings.
Prudential launched its guaranteed pension annuity in the 1950s, but some of its peers have been busy setting up new products much more recently (see table one, page 31).
Aegon Scottish Equitable unveiled its compulsory purchase annuity in 2005 and its immediate vesting personal pension annuity in 2006 – the year of A-day. This particular year also saw Canada Life launch its lifetime annuity, Living Time set up its 75 plan and income plan, and Norwich Union launch its pension annuity.
All the providers offer level annuities and escalation, and the majority offer index-linked products (Canada Life, Just Retirement, Legal & General, LV, Norwich Union, Prudential and Scottish Widows).
Interestingly, Living Time and Winterthur Life do not offer their annuities via the OMO.
In terms of purchase price, there has been much criticism of providers for failing to take on small pension pots, and advisers failing to advise on them.
According to the PM survey, just four providers take on pots that are less than £10,000 and only one takes on pensions of less than £5,000 (Legal & General). More on the OMO and small pensions later.
Norwich Union commands the largest market share of annuity premium income (see table two, page 32). Last year it vacuumed up almost £1.5bn (£1,467.9m) and in Q1 this year, it accumulated £711.1m of income.
Aegon Scottish Equitable scooped the second largest amount of money in 2007 with £1,065m.
And Winterthur Life appears to be the smallest fish, pulling in £61.1m of income last year, and £14.7m in Q1 this year.
Across table three (page 33), it’s a mixed bag as to who offers the best rates in the different categories.
But what is obvious is that Axa has the worst rates in 15 of the 24 categories. Aegon Scottish Equitable has six of its rates as worst in class, but does manage to provide two top quotes. And Winterthur holds the other three bottom rates.
