As longevity continues to increase Craig Fazzini-Jones believes the pressure is on annuity providers to come up with innovative solutions
With growing numbers of pensioners in the UK and increasing longevity, the downward squeeze on annuity rates will get worse in the longer term. As a result, those approaching retirement will have to carefully consider the annuity they buy and take an active approach to their retirement income planning. Longevity will put increasing pressure on annuity providers to create innovative products that counter the mounting demographic and economic pressures on rates.
Annuity rates have continued to fall over the last quarter. According to our latest Annuity Index1, that tracks the income paid on standard and enhanced annuities, between December 2009 and March 2010 annuity rates fell 0.58%, compared to 1.64% between June 2009 and November 2009. Indeed, if the much-needed market recovery takes place, gilt and corporate bond yields could continue to dip and therefore annuity rates will go down. Current uncertainty in the UK economy could keep yields higher for a time but the medium to long-term trend for annuities is downwards.
The introduction of new regulation such as Solvency II and the effects of quantitative easing could reduce rates by up to 20% over the next few years, and increasing life expectancy will considerably add to these pressures on annuity providers, squeezing rates even further.
Cost of living
Those approaching retirement could not only have falling rates to contend with, but also a high cost of living. Analysing cost of living figures2 shows that currently 20 years of retirement will cost the average household £564,227. Therefore, retirement savings will have to work even harder just to maintain existing living standards.
Considering the significant cost of retirement and the fact that those retiring today can expect to live for 20 years, funding it is a difficult task, let alone with falling annuity rates. Indeed life expectancy in retirement is set to increase further, making future retirement funding even trickier. According to the Office of National Statistics, by 2033, 23% of the population will be aged 65 and over and since 1950 the number of centenarians in England and Wales has increased faster than any other age group.3 Indeed, the number is expected to rise from 12,000 today to more than 280,000 by 2050, according to Aegon.4
Retirement planning will have to radically change for retirees to make the most of their pension savings. Currently people do not give enough consideration to retirement financial planning, and many do not even consider the open market option (OMO). Indeed the OMO should be the default option at retirement, encouraging people to take control of their retirement fund.
As well as shopping around, people will increasingly need to keep more of their assets exposed to the stock markets – with the appropriate level of tailored protection – in order to ensure a sufficient level of income.
There will also be higher demand for retirement products that can protect income from the negative effects of inflation and falling rates through a degree of market exposure, as well as offering flexibility for varying income levels at the different stages of retirement. There needs to be radical change in the annuity industry in order to deliver new solutions that are based on providing enhanced investment returns and offer greater flexibility. Specifically, this necessary shift in retirement planning will fuel strong growth for the asset backed annuity market.
The annuity industry has a responsibility to create flexible and competitive products for an expanding and ageing retired population and it must ensure that people are told at every opportunity as they near retirement that they have the option to shop around. Likewise, consumers need more information to help them understand the need to proactively take action and that their financial decisions at retirement will have a significant impact on their quality of life in old age.
1Based on the MGM Advantage Annuity Index
2Based on MGM Advantage analysis of the ONS Family Spending Reports
3Office for National Statistics
4AEGON Pensions Manifesto, April 2010
Craig Fazzini-Jones is director and head of Designs for Retirement at MGM Advantage
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