Figures from the ABI revealed a 16% drop in annuity sales in 2013. Jenna Towler finds out what's behind the significant change
Procrastination is the thief of time, or so the saying goes. But it appears deferring making a decision on retirement income is becoming a far more common occurrence.
In total, 353,000 annuities worth just under £12bn were sold in 2013, and the number of contracts sold on the open market was up. However, according to statistics from the Association of British Insurers (ABI), there was as a 16% fall in overall annuity sales year on year.
So, what's behind the plunge? The ABI said its members – the providers themselves – reported many more clients were deferring making their retirement income choice.
Hargreaves Lansdown said the fall in annuity sales came against a backdrop of the baby-boomers hitting their mid-sixties, suggesting it would be logical to expect a surge in annuity sales. However, this has not materialised.
Occupational pension consultant Towers Watson said demographics were an extremely important factor in explaining the numbers.
Its senior consultant David Robbins explained: "When trying to explain annuity sales figures, don't forget the demographics. There were 9% fewer 65-year-olds in mid-2013 than a year earlier and also fewer people aged 61 to 64.
"Of course, there are other possible explanations – from people delaying retirement to men bringing forward annuity purchase to 2012 when male-only products were still on the shelves. But you only buy an annuity once, and the biggest group of post-war baby boomers may already have bought theirs."
Robbins also said the surge in enhanced annuity sales would cut into standard annuity sales figures. Some 28% of annuities sold in Q4 last year were enhanced, this was up from 7% in the same period in 2008.
Robbins added: "It's often overlooked that this will have an adverse effect on standard annuity rates – if insurers expect people buying standard annuities to live longer on average, the rates will be worse."
Hargreaves Lansdown's head of pensions research Tom McPhail said there had been a clear shift in the retirement market.
He said: "The retirement income market appears to be shifting, with demand for annuities collapsing and surging interest in drawdown.
"The first wave of baby boomers has passed age 65. But even so, we would expect annuity sales to stay high yet they were lower in 2013 than in 2011, when fewer people were reaching their mid-sixties.
"There are lots of factors at work here, including the wider economic background, sentiment about future interest rates and actual retirement ages; low annuity rates in recent years compared to historic averages may have had an impact, too."
McPhail urged all retiring investors to go through the three Ts – timing, type and terms – to decide when they want to retire, what sort of retirement income they want and where they can get the best deal.
| 2013 in annuity numbers
There were 353,000 annuities sold in 2013
LV= launches fixed-term annuity adviser app
Annuity provider LV= has set up an online annuity calculator and app to help advisers investigate the fixed-term annuity options for clients.
In a report on the market, it said as clients now spend between 20 and 30 years in retirement, the inflexible nature of a lifetime annuity can be too limiting.
For example, it said if a client is suffering from a medical condition that is too mild to warrant an enhanced rate now, but is likely to deteriorate over time or if there is a family history of ill-health, then buying a standard annuity may not be the right option.
Its calculator and app has been set up to help advisers identify where a fixed-term annuity may or may not provide a better outcome for clients. Advisers can use these tools to create illustration charts and printable reports specific to a client's individual circumstance.
Head of distribution Steve Lewis said: "With people spending longer in retirement, many clients would benefit from increased flexibility as to how they take their income and we believe fixed-term annuities have a valuable role to play.
"Our report provides advisers with robust data that indicates the situations where these products can add real value. More advisers and customers now understand the benefits of fixed-term annuities and as a result demand continues to grow."
No preferred charging model
To 1,552 families and businesses
HL and Liberty SIPP slowest
Lifetime and annual allowances