To date, seven firms have ceased offering annuities to the open market since pension freedoms were announced in 2014, although some still annuities to their own customers.
The pension reforms effectively gave savers the right to take their entire pension as cash, or keep it invested, and resulted in sales of annuities plummeting overnight. Yet many still want the safety net of guaranteed payments and they are faced and they are faced with an increasingly uncompetitive market. Rates have nearly halved over the past decade. Of the seven providers selling the contracts – which can pay a fixed or “level” income or one that is linked to inflation – on the open market, only five offer standard annuities. These are for people in average or above average health. Two firms exclusively offer “enhanced” annuities, which pay out a higher annual amount for those with a lifestyle likely to result in a lower life expectancy, such as people who smoke or have diabetes.
Annuity rates are closely linked to the yield on government bonds, wwhich declined dramatically following the 2008 financial crisis. At present, for a 65-year-old with a £100,000 pot buying a standard annuity (with no payment on the annuitants death) the best annual income on offer is £5,151.
What happened to annuities?
The stable, lifelong income offered by annuities used to make them the default - and in many cases only – option for savers reaching retirement. However, low interest rates have increased providers’ costs, as has increasingly onerous regulation surrounding capital reserves. Pension freedoms, introduced in 2015, opened up other options. Individuals can now make use of drawdown to take an income while remaining invested, or even take full control of their pension pot.