UK sales of enhanced annuities to people with a reduced life expectancy continued their downward spiral in the final quarter of 2014, according to research by Towers Watson. Total quarterly premiums fell by a further 13% in the fourth quarter to £334.8 million, as the impact of the spending freedom that will be available to retirees with defined contribution (DC) pension pots from April 2015 hit home.
Combining the latest drop with quarter-on-quarter reductions of 36% in the third quarter of 2014, 29% in the second, and 12% in the first, total enhanced annuity sales were 65% lower in the fourth quarter of 2014 compared to the equivalent period in 2013 - and 44% down over the year as a whole.
Sales of variable annuities - providing regular income payments that are guaranteed not to fall but may also rise if investments perform well - also fell, but less severely. Fourth quarter 2014 sales of £192.8 million were 23% less than in the same quarter of 2013, with the total 2014 annual sales of £866.8 million representing 78% of the 2013 sales total.
Jeremy Nurse, a director at Towers Watson, commented:
“The reductions in annuity sales, particularly to those with reduced life expectancy, are an inevitable reaction to people anticipating greater freedom about how they use their DC pension. Declining gilt yields over the second half of 2014 continued to put downward pressure on annuity rates, which has only added fuel to the fire of doubt surrounding annuities at the moment.”
He added: “Riding out this storm is clearly proving painful for enhanced annuity providers, but we expect to see some stability returning to the annuities market, albeit at a lower overall sales level, once people grow comfortable with the nature of the guidance promised as part of the Government package and as they understand better how other courses of action may affect their tax position. Traditional annuity products, along with some of the more flexible annuity products already available and those being mooted in the market, will undoubtedly continue to suit the risk and tax considerations of many retirees.”
A recent Towers Watson study estimated that inflows into the retirement market will reach £50 billion by 2023. Jeremy Nurse noted: “The split by product remains to be seen. However, the larger level of funds may offer some comfort to annuity writers, as it suggests the possibility of some recovery from current levels over time and as uncertainty recedes.”
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