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Spiking annuity rates have led to a surge in sales for insurers, as UK savers seek guaranteed incomes to weather uncertain economic conditions.
Canada Life reported annuity sales doubling to £441mn in the first half of the year, compared with the same period in 2022. Just Group saw sales leap by 54 per cent to £470mn and Legal & General reported a 27 per cent rise to £575mn.
These sales figures include both lifetime annuities and fixed-term products, giving an income for a set period such as 10 years.
For lifetime annuities, the bulk of the market, the Association of British Insurers, a trade body, reports that some £2.3bn were sold in the first half 2023, up from £1.7bn in the same period last year.
The increase in demand has been triggered by the rapid rise in interest rates, which has seen the best rate on the market soar from 5 per cent in August 2021 to 7.3 per cent this month for someone taking out an annuity aged 65, according to platform Hargreaves Lansdown.
Savers have also been drawn to the security of an annuity income at a time when investments in stocks and bonds, the mainstays of most retirement portfolios, have been battered by concerns about high inflation and uncertain investment returns.
“Volatility in the market and certainty that annuities provide are changing mindsets,” said Lorna Shah, managing director of retail at Legal & General. “People are moving away from a once and done binary decision on whether you have an annuity or drawdown.”
The comeback in annuities follows a series of financial reforms that encouraged savers to look elsewhere.
The introduction of pension freedoms in 2015 damped demand for the product, as older savers were no longer compelled to purchase an annuity with their pension. Instead, they were able to keep their pot invested while taking a regular income.
An average of 70,914 annuities have been purchased in the market each financial year between 2015-16 and 2021-22, according to the Financial Conduct Authority. Sales initially declined but bounced back last year.
“You might have had to live 20 years to get your money back. As rates improved, the maths works out better,” said Pete Matthew, chief executive of Jacksons Wealth Management. He said annuities were helpful in securing clients a minimum income, enabling them to take more risk with the remainder of their pot.
Data from the ABI shows that the number of providers available on the open market fell from 14 in 2013 to six at the start of this year. Standard Life is now in the process of re-entering the market.
Tim Pike at the Pension Policy Institute, a think-tank, said market consolidation had previously contributed to more people opting to enter drawdown due to limited consumer choice. He said consumers were now more attuned to rate differences, but products would need to evolve to meet the needs of savers retiring without a defined benefit pot.
Matthew argued that annuities were still less appealing for those with large pension pots as they could still draw a respectable income despite market dips, while others were put off by the upfront cost and the fact that an annuity generally died with the holder or their spouse.
Providers maintained that the product would continue to attract retirees despite the possibility that rates will start to fall next year.
Shah added: “At some point, annuity rates will start to come back down, but at levels higher than the lows we have seen in recent years . . . The certainty it gives to retirees is really important.”
