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Asset manager Standard Life launched a pension annuity product, another sign of revitalization in the fixed-income market amid rising interest rates.
Pension annuities, which allow retirees to use some or all of their pension savings to buy a steady income for life, have grown in popularity over the past 18 months as interest rates allow them to provide higher levels of income.
“Annuities are getting more and more valuable, with current rates increasing by 20% over the past 12 months through June 2023,” said Claire Altman, managing director of Individual Retirements at Standard Life.
She added that its research showed three-quarters said they wanted “income certainty” in retirement while the economic outlook remained uncertain.
In 2015, the pensions market was hit by the Pension Freedom Act, which removed any obligation for retirees to spend their pensions on fixed products. After the financial crisis, when annuity rates fell due to low interest rates, many savers turned to “withdrawal” products, investing their savings in and being exposed to stock market volatility.
Since the end of 2021, interest rates have gone from near zero to over 5% in less than two years. Some annuities, known as enhanced or impaired annuities, now offer rates in excess of 8 per cent for retirees with “poorer” health, according to pensions advice website mypensionexpert.
Annuity sales have risen sharply over the past year as UK savers seek secure income amid uncertain macroeconomic conditions. According to the Association of British Insurers, life annuity sales will be around £2.3bn in the first half of 2023, up from £1.7bn in the same period in 2022.
Standard Life offered annuities on the public market until 2017, and has since offered multi-asset strategies for retired investors. Other insurers, such as Prudential, also stopped offering these products.
In 2019, Standard Life was fined £30m for improperly selling annuities to customers over the phone between 2008 and 2016. The Financial Conduct Authority claimed the company failed to tell customers with health problems that they could buy better “enhanced” products elsewhere.
Some in the industry welcomed the Edinburgh-based company’s entry into the industry, as increased competition would benefit investors. The market is dominated by insurers such as Aviva, Canada Life, and Legal & General.
Helen Morrissey, head of retirement analytics at Hargreaves Lansdown, said: “The re-entry of Standard Life has provided a welcome boost to the annuity market and provided more options for those who need income security in retirement.”
“We’ve seen a spike in annuity rates over the past 18 months revitalize the market . . . increased competition from such a well-known name should help boost retiree incomes and benefit the annuity market as a whole,” Morrissey said.
The investment platform said the number of annuity offers based on factors such as age and health surged more than 120% in the 12 months to July 2023 from the previous year.
“Annuities do mean that you give up the opportunity to earn high returns by investing your assets in stocks or higher-return forms,” said David Sturrock, a senior research economist at the Institute for Fiscal Studies think tank. .
Still, he warns that some investors may misjudge annuity returns by underestimating their longevity. In times of higher inflation, retirees need to look beyond headline income figures and consider inflation protection, he added.
“Inflation-neutral annuities may be more of a concern if inflation is high for a prolonged period,” he said. “Your initial income from a non-inflation indexed annuity will be higher, but that will come at the expense of lower future income. “
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