Demand for annuities will fall in the short term but improved products will win back consumers in the longer term, according to a review of markets in other countries by the Pensions Policy Institute (PPI).
A report published by the PPI today – Freedom and Choice in Pensions: comparing international retirement systems and the role of annuitisation – argues that innovations in the market, such as annuities that can also provide elements of insurance for health, disability or long-term care needs during retirement, and deferred annuities that can be combined with income drawdown products to provide insurance against very long life, could provide features that consumers value.
The report examines factors that affect demand for annuities across different countries around the world to inform how the market could develop in the UK. Factors include underlying cultural attitudes and the appetite for a secure and guaranteed source of income in retirement, the structure, variety and perceived value of other retirement income products on offer in the market; the timing and framing of the decisions about how to allocate pension savings; and the perceived attractiveness of the annuity rates on offer.
The report points to the 80 per cent annuity take-up in Switzerland, where access to funds is permitted, but where generous rates are set by the Government and guaranteed by schemes. It also highlights 70 per cent annuity take-up in Chile and 85 per cent in Denmark, and calls from countries with low levels of annuity take-up such as Australia and USA to make annuitisation more widespread.
The PPI is also announcing today the launch of a major new research series on Transitions to Retirement. This research stream will run throughout 2014-15 and will explore the complexity of decision-making at retirement and the scope for innovation in retirement income solutions and drawdown products in the UK.
PPI deputy director Mel Duffield says: “Since the Budget announcement there has been a lot of uncertainty about the outlook for the UK annuities market, with the Treasury figures suggesting that take-up of annuities amongst retirees with DC pension pots could fall from around 75 per cent now to 50 per cent post-April 2015. Other commentators have made more pessimistic predictions.”
“In Switzerland, where unlimited access to private pension saving is allowed and annuity rates are seen as good value, around 80 per cent of DC savings are still put into lifetime annuities at retirement. And in Denmark, where decisions in some voluntary pension saving vehicles on how to allocate savings are taken well ahead of retirement, around 85 per cent of voluntary pension savings are being allocated to either lifetime or fixed-term annuities.
“In other countries, such as Australia, Canada and the US, lifetime annuities play only a small or negligible role in the market. However there are growing concerns in these countries that retirees are not well enough informed about their retirement needs and are running down their pension savings too quickly.”