Pensions - Articles - Guaranteed incomes in retirement


An increasing number of annuities are being purchased at the age of 75 or older, suggesting that people may appreciate the value of guaranteed income more as they age.” says Mark Ormston following the publication of the PPI briefing note.

 The Pensions Policy Institute (PPI) have published a briefing note entitled “Set for life? – Guaranteed incomes in retirement”, sponsored by Retirement Line, Phoenix, B&CE, Hymans Robertson and State Street Global. The briefing note explores the current annuity market and sets the scene for a future report, due to be published in the autumn, which will investigate if there is an optimum time for people to purchase an annuity.

 • The average pot size used for purchasing an annuity has almost doubled since 2015, rising from £37,000 to £71,000. However, in recent years there has also been higher use of small pots (under £10,000) being used to buy annuities. This under £10,000 bracket accounted for only 16% of total annuity purchases in 2016/17 whereas, in 2020/21 23% of all annuity purchases were with pots of under £10,000
 
 • After a period of decline, the annuity market has appeared to have levelled off, with a similar number of new purchases having been made over recent years, and annuity purchases accounting for around 10% of the market share

 • Over the last 40 years, life expectancy at age 65 has increased by almost six years for men and five years for women, and while actuarial valuations will take account of this, it not only means that people could benefit for longer from a reliable income, but also that those who withdraw large sums at retirement will have to make their remaining pension pot last longer
 
 Mark Ormston, Director of Propositions at Retirement Line said: “Although the total number of annuities being purchased has remained fairly consistent in recent years, there have been some interesting potential early trends forming within the data since Pensions Freedoms. For example, the number of annuities being purchased at the age of 75 or older has doubled in percentage terms in the last 5 years (FCA reporting periods 2016/17 – 2020/21).

 It will be interesting to see if this potential trend continues in future years, as it has been widely thought for some time that many people may turn to an annuity to provide secure guaranteed income in later life. So far, the data we have available to us since Pensions Freedoms is seemingly supporting this view.

 There are many reasons why people may look to annuitise later in life, including the fact that annuity rates improve with age. At present, a 65-year-old can expect an annuity rate of around 6%, whereas, a 75-year-old can expect an annuity rate closer to 8% (providing 33% higher yearly income than at age 65).

 Another key reason might be that an annuity can help with longevity risk, as stated in the briefing note, “Over the last 40 years, life expectancy at age 65 has increased by almost six years for men and five years for women”. If longevity improvements continue at a similar rate in future years, when I reach the age of 65 it may well have increased by 10 years or more in my lifetime alone. With this in mind, I am very supportive of the idea of providing regular access and promoting the use of longevity tools and accurate annuity quotations throughout people's pension access journey and not just at the first point of first-time access.

 This briefing note sets the scene very nicely for a full PPI report which will be published later this year investigating whether there is an optimum time to purchase an annuity.”
  

 Set for life? – Guaranteed incomes in retirement

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