At Retirement Report Edition Three, January 2015 www.iress.co.uk
Contents Foreword 2 Executive summary 3 A sea change for at retirement 4 Falling rates undermine annuity income 5 An incentive to shop around 7 The regional picture in 2014 9 Equity release goes from strength to strength in 2014 11 Outlook 12 Appendix 13
www.iress.co.uk 2 Foreword 2014 was a turning point year for those approaching retirement, with the Government s pensions reforms signifying the biggest change to at retirement decision making, options, and advice in a generation. Since the changes were announced in the Budget, our At Retirement reports have tracked the impact these have made on the market and consumers demand for retirement income products. In this edition, we examine how annuity demand and rates have changed in the final quarter of the last year. With demand for single life annuities down 30.1% in 2014 compared to 2013, we also look at the year as a whole to assess the extent of the short-term impact on the market, as consumers and providers alike hold their breath ahead of the reforms coming into force in April. Additionally, our research seeks to see whether the size of pension pots and outcomes for those seeking financial advice has changed in the last year. With annuity rates far from their historic peak, we also look to assess the extent to which equity release has filled the income gap for retirees in 2014, and its prospects for growth in 2015. We also examine the role drawdown is playing - and will play in the future, alongside flexible lump sum as we look forward to the new world at retirement. While it seems clear that providers, advisers and consumers alike are waiting to see the shape of things following April, the last three months have seen further recommendations from the FCA for the retirement income market. A key element of this is ensuring consumers are able to compare annuity rates if they decide to annuitise. With this in mind, we take a look at the difference between the best and worst rates in 2014, as well as the importance of securing an enhanced product, if applicable. We hope you enjoy reading our report. Andrew Simon Executive General Manager, Product IRESS
3 Executive summary A sea change for at retirement 4 2014 sees demand for advised annuities fall 30.1% compared to 2013 Demand for annuities down 26.7% in Q4 2014 compared to Q3 Seasonal factors, on top of consumers delaying decision making until April, accentuate decline in Q4 Falling rates undermine annuity income 5 Average rates continue to fall, hitting 5.17% in December compared to 5.45% at start of year Pension pot sizes fall to 58,455 in December, but still up 1.6% year on year As a result, average income secured falls to 3,019 in December, down 3.4% on November An incentive to shop around 7 The regional picture in 2014 9 London boasts average single life pot size in 2014, 19.1% higher than UK average East of England next largest, followed by South East Northern Ireland has smallest pots in UK in 2014, followed by Wales Equity release goes from strength to strength in 2014 11 Equity release sales made via an adviser 8.1% higher in 2014 than 2013 Rising house prices boost average initial lump sum release by 20.7% or 40,526 in 2014 Average value of a property used to release equity up 9.4% annually to 451,503 in 2014 Outlook 12 Gap between best and worst average single life annuity rate averaged 0.72% in 2014, rising to 2014 high at start of Q4 Less than one in five annuitants secured enhanced products in December, down annually Annuities for smokers secure average income 10.8% greater than standard annuities in 2014 Methodology: IRESS research team analysed data from IRESS The Exchange, its online comparison quote and transaction portal, analysing more than 150,000 key fact illustrations. Pension pots are exclusive of any tax-free lump sum, and refer to those securing a single-life, standard annuity unless otherwise stated. All annuity rates data is based upon analysis of rates available at 65, with a five year guarantee, averaged across three separate pot sizes ( 100,000, 75,000 and 50,000) and multiple postcodes. Equity release data incorporates reversion, lifetime and interest only products. The data does not include those who do not secure an annuity or equity release product via an adviser.
www.iress.co.uk 4 Section 1: A sea change for at retirement 2014 saw the wind knocked from the sails of annuity demand, with sales of single life annuity products via advisers in the full year down 30.1% compared to 2013. While demand was actually in positive territory in the early part of the year, March s Budget put the market into reverse gear, as thousands of prospective annuitants held-off making their long-term decision until the full changes announced come into effect. Equally, overall demand for annuities has been affected by an increased number of annuitants taking advantage of increased flexibility to unlock smaller pots to access savings, following the Chancellor s announcement, rather than securing a small income. As a result, single life annuity sales in the second half of the year were 39.4% lower than in the first half of the year. In fact, sales in the second half of the year totalled just 10% less than those in the first quarter of 2014. While we saw a mini-bounceback in demand in the third quarter, the final quarter of the year resumed the trend we have seen since the Budget, with the traditional Christmas lull accentuating the decline. In Q4 2014, demand for single life annuities was down 26.7% compared to the third quarter, 56.6% lower than in Q4 2013. December saw demand fall to its lowest level in at least two years, down 32.6% on November. However, as a result of the long term trend, on an annual basis, this represented a 58.8% drop. 160 Indexed Single Life Annuity Sales (April 2012 = 100) Calm before the storm In some ways, we are in the calm before the storm. It s clear that many consumers are adopting a wait-and-see approach, with a significant proportion delaying decision making around their pension decumulation in 2014, or waiting to cash out more of their savings. One estimate from Hymans Robertson suggests 6bn of pension savings will be unlocked in the four months following April 6. While annuity demand, especially for smaller pots, is under pressure in the short term, drawdown continues to go from strength to strength. The ABI s latest figures show that sales more than doubled in the Q3 2014, with sales of contracts up 123% year on year. As retirees look for increasingly varied and flexible options - that are likely to include some form of guaranteed income as well as investment - drawdown will grow in popularity in the long term, as well as the short term. Many providers are waiting for April to launch new product suites, and we are unlikely to see annuity or hybrid propositions come to market until all the regulatory changes are in effect. However, both MGM Advantage and Prudential have launched new drawdown products in the last few weeks. Equally, the FCA s latest review recognised the expansion of drawdown. One of its concerns was ensuring the mass market distribution of drawdown products was appropriate and provided guidance arrangements, if it was to become a more commonplace non-advised decision. While drawdown is an increasingly popular decision, it important that consumers are fully aware of what it involves, the risks as well as rewards, and how it compares to annuitising. 140 120 100 80 60 40 Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec 2012 2013 2014
5 Section 2: Falling rates undermine annuity income 2014 was broadly characterised by a decline in annuity rates, lowering the income the average annuitant secured, as well as proving an additional dampener on demand. The average rate for a standard single life annuity was at its highest in the year in January, standing at 5.45%. This fell to 5.17% in December, down 28 basis points compared to December 2013 as 15 year gilt yields dwindled and the prospect of interest rate rises became more distant. 3900 3700 3500 3300 3100 2900 2700 2500 Average Standard Single Life Annuity Rates and Incomes Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 2014 Average Income (LHS) Average Rate (RHS) 5.50% 5.45% 5.40% 5.35% 5.30% 5.25% 5.20% 5.15% 5.10% While this decline seems small at first glance, it has a tangible impact on average incomes. For instance, a retiree with a 100,000 pot could see an income of 279 less per year by annuitising in December as opposed to January, a drop of 5.1%. Over a 25 year retirement, this would amount to 6,999.
www.iress.co.uk 6 The final quarter of the year saw average incomes secured fall back as the average size of an annuity pot shrank at the same time as rates fell. 75,000 70,000 65,000 Average Pension Pot Size for Single Life Annuity In December, those who bought a single life standard annuity via an adviser did so with an average pension pot of 58,455, down by 19.0% from September - but still up by 1.6% compared to the average pot of 57,535 in December 2013. Overall, the average pot in the final quarter of the year stood at 58,687, representing a 14.6% quarterly decline, but an increase of 0.4% compared to the same period in 2013. 60,000 55,000 50,000 45,000 40,000 Q2 Q3 2012 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2013 2014 Q4 As a result, the average future income being secured through a single life annuity fell at the end of the year, reaching its lowest level since March. The average income being secured per pot stood at 3,019 per year in December. This represents a 3.4% fall compared to November, with income now 3.7% lower than a year ago, when the average stood at 3,136. In 2014 as a whole, the average annuity pot was 3,167 larger than in 2013 - standing 5.5% greater at 61,155. The average income secured stood at 3,274.
7 Section 3: An incentive to shop around Value for money has been central to the debate surrounding annuities and at retirement in 2014. The FCA s findings published in December found that for people with average-sized pension pots and a low risk appetite, the right annuity purchased on the open market offers good value for money compared to other investment options. However, shopping around for the best prospective rate available for their circumstances is crucial to gaining the best outcome possible, especially given the discrepancy between the best and worst rates available, and the difference between enhanced and standard annuities. In 2014, the average difference between the best and worst rate available for a standard single life annuity was 72 basis points, with the average best rate standing at 5.65% compared to an average worst rate of 4.93%. This gap was equivalent to 444 in income per year for the average pot -12.8% - and would equate to a difference of over 11,100 over a 25 year retirement. At the start of Q4, the gap between the best and worst rates on offer reached its widest in 2014. The average best rate available stood at 5.54% compared to the average worst rate of 4.77% - a gap of 77 basis points, and equivalent to a difference in income of 13.9% for the average pot. By the end of 2014, this had fallen back to 70 basis points, with the average best rate available standing at 5.44% compared to the average worst rate of 4.74%. While this gap does not seem large at first glance, it represents a difference in income of 12.9% for the average pot. With annuity rates under pressure, shopping around is even more important. The FCA s recent report recommended a change to the wake up packs received by those retiring, encouraging the comparison of rates across the whole market for all consumers. This is to be welcomed, and further supports the important role full financial advice plays. Given the complexity of annuity product options, let alone the increased options at retirement, it will be increasingly important in 2015 to help retirees secure the best product for their circumstances if they do opt to annuitise. Central to this is highlighting whether an annuitant is eligible for an enhanced annuity, which provide better rates. Standard Single Life Annuity Rates 6.00% 5.80% 5.60% 5.40% 5.20% 5.00% 4.80% 4.60% 4.40% Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 2014 Average Rate Average Best Rate Average Worst Rate
www.iress.co.uk 8 Enhanced annuities The take up of enhanced annuities fell in the last three months of the year. In December, less than one in five (17%) of those annuitising via an adviser secured an enhanced annuity. This has fallen from 31% in September, and is down from 29% a year ago. In 2014 as a whole, 28% of annuitants secured an enhanced product, compared to 20% in 2013. In December, 16% declared they are smokers, down from the 23% in September, and 19% a year ago. The average rate for a single life annuity for smokers is now 5.62%, 0.45% higher than for non-smokers. For an annuitant with the average pot size, this represents a difference of 8.7% in annual income. Over the course of 2014, the difference in income has averaged 10.8%. Here too, understanding the value of comparing available products is invaluable. The FCA s research found 91% of consumers buying an enhanced annuity could have got a better deal through shopping around rather than their in-house provider, and this is apparent in the gap in rates. In December, the difference between the best and worst average annuity rate for smokers stood at 140 basis points with the best average rate 6.14%, a far larger variation than for among standard annuity products. If the FCA s recommendations, combined with the launch of the government s Pension Wise guidance service in April, encourage greater shopping around - as well as allowing consumers to understand their eligibility for enhanced annuities - they will be a significant step forwards for those who decide to annuitise.
9 Section 4: The regional picture in 2014 The size of retirees pension pots - and subsequent incomes - varies strongly across different geographical regions, with the difference in average affluence in each region affecting accumulation. Across the UK, the average pot size was largest in London in 2014, with an average of 72,981-19.3% higher than the UK average. Those annuitising in the East of England and the South East saw the next largest pots ( 67,581 and 65,358 respectively). Meanwhile, Northern Ireland and Wales boasted the smallest pots ( 51,964 and 52,344), with Northern Ireland s 15% below the national average Region Average Pot Size 2014 ( ) London 72,981 South East 65,358 East 67,581 Midlands 57,879 South West 57,871 Scotland 56,993 Northern Ireland 51,964 North East 53,795 North West 58,212 Wales 52,344 UK 61,155 Average Pot Size in 2014 ( ) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 London South East East Midlands South West Scotland Northern Ireland North East North West Wales UK
www.iress.co.uk 10 UK Average 61,155 51,964 Scotland 56,993 Northern Ireland North East 53,795 58,212 North West 57,879 67,581 Midlands Wales East 52,344 South West South East London 65,358 57,871 72,981
11 Section 5: Equity release goes from strength to strength in 2014 With house prices climbing significantly in many parts of the country, property is becoming an increasingly important consideration for financially planning for retirement, and releasing equity is becoming a more widely used means of funding retirement. In our last report, we highlighted the potential growth of equity release, given that over 55s in the UK hold 2.1 trillion in property wealth. 2014 has certainly shown the market is expanding. In 2014, sales of equity release products via an adviser were 8.1% higher than in 2013, with demand in Q4 up 12.9% annually. Equally, as property prices have increased, so too has the average initial lump sum secured by those releasing equity. In 2014, an average sum of 40,526 was secured, 20.7% higher than the 33,583 secured in 2013. The average value of a property used to release equity has also risen, up 9.4% to 451,503. With many consumers likely to unlock pension pots, or opt not to secure guaranteed income products post- April, we may see an increase in retirees with insufficient income looking for additional avenues to sustain their desired lifestyle once they have retired. With this in mind, equity release demand is likely to increase in the longer-term. While not appropriate for all, it is important consumers understand all their potential funding options at and in retirement, and equity release is a key part of this.
www.iress.co.uk 12 Outlook The last year saw a vast upheaval in the world of pensions, and the options consumers face at retirement. The Budget s changes have already had a strong knock-on impact in demand for annuities, but we are yet to see the full fallout in terms of longterm changes to consumer behaviour and product development. This should become more apparent in 2015, following many of the changes coming into force in April. In our previous editions, we have seen evidence that smaller pots are being taken as cash, rather than annuitised, and we anticipate this trend will continue in 2015. According to The Platforum, advisers expect that 27% of assets they formerly put into annuities will still be put to the same use after April. However, there is still a clear need for financial security as longevity increases, and it will remain a key component of retirement planning. As a result, we envisage that larger pots will be split between cash, drawdown from investment and annuities, with demand for annuities as part of this likely to fluctuate depending on driving factors such as rate changes when interest rates are normalised. We are yet to see a flurry of hybrid style products on offer, but we anticipate that product development will include a focus around flexible income products bundling cash, investment drawdown and annuity elements, which may involve the weighting towards drawdown or annuity income changing as an individual s circumstances change. As we undergo these changes, challenges remain for consumers. Simple guidance from the Pension Wise scheme will provide an important avenue to educate consumers as to their options, but the complexity of options will require more bespoke and detailed advice. We have seen the importance of securing the most appropriate annuity product and shopping around for the best rate. But with hybrid, investment and flexible options on offer, like for like comparisons between products will become even more difficult. All of this points towards advisers growing, rather than dwindling, in importance at retirement in 2015.
13 Appendix Average pot size, annuity rate and income for standard annuitants (single life). Average Pot Size ( ) Average All Rate Average Income ( ) Jun 13 57,560 5.11% 2,942 July 13 57,940 5.27% 3,053 Aug 13 58,085 5.35% 3,107 Sep 13 60,254 5.42% 3,265 Oct 13 57,707 5.35% 3,087 Nov 13 60,145 5.35% 3,215 Dec 13 57,535 5.45% 3,136 Jan 14 55,575 5.45% 3,026 Feb 14 54,745 5.44% 2,980 Mar 14 53,516 5.42% 2,902 Apr 14 59,368 5.43% 3,223 May 14 63,158 5.42% 3,426 Jun 14 65,232 5.44% 3,552 Jul 14 65,285 5.43% 3,544 Aug 14 68,779 5.29% 3,642 Sep 14 72,134 5.28% 3,810 Oct 14 57,765 5.24% 3,027 Nov 14 59,842 5.23% 3,127 Dec 14 58,455 5.17% 3,019
For further information: Teamspirit PR: Dan Pike / Kate Cunningham IRESS@teamspiritpr.com T: 020 7360 7878 IRESS: Debra Knott debra.knott@iress.co.uk T: 01926 621410 M: 07769 271584 IRESS UK Limited www.iress.co.uk