At Retirement Report Edition Two, November 2014 www.iress.co.uk
Contents Foreword 2 Executive Summary 3 Product Demand 4 Outcomes for Annuitants 5 Advice at Retirement 7 The Regional Picture 8 Product Innovation 10 Releasing Equity In Retirement 11 Conclusion 12
www.iress.co.uk 2 Foreword In our first At Retirement report, we focussed primarily on the dramatic impact the changes announced in the Budget had on the decisions of those at retirement, highlighting the immediate effects the move had on the market, triggering a 44% drop in demand for single life annuities via advisers in e compared to the previous year. This latest report reveals that there is some tentative sense of demand stabilising, rising by 14% since its trough in e. In the wake of March s radical policy shift, The Treasury continues to drip feed clarifications and additional changes, with moves to remove the 55% tax on inherited pension sums and most recently, reforming the way small sums can be accessed from pension pots after the age of 55. Against this changing back drop, it remains too early to assess whether definitive long-term trends are emerging in consumers approach to retirement. However, with ever more options, and the greater ability to access pension savings, it is important that consumers understand the full range of options and their advantages and drawbacks before acting. Our research aims to analyse how the average pensions saving pot of those seeking advice is changing, how demand for annuities is evolving, and how annuity rates have moved in the last quarter. We break all of this down by region, gender and product type. We also provide a special focus on the option of equity release in retirement. With retirees no longer obliged to purchase an annuity from April next year, and average retirement incomes showing signs of improving, we examine whether equity release can cover prospective shortfalls for pensioners, and whether it is likely to grow in popularity after April 2015. We hope you enjoy reading our report. Andrew Simon Executive General Manager, Product IRESS
3 Executive summary Product Demand 4 Annuity demand stabilises, up 14% compared to e trough Annuity sales up 10.5% on monthly basis in September, but still 47.1% down annually Outcomes for Annuitants 5 Average income of annuitant climbs 4.6% on monthly basis to 3,810 Increase due to larger pot sizes, up 4.9% to 72,134 in September as smaller pots unlocked Annuity rates under downwards pressure, falling to lowest in over a year at 5.28% The Regional Picture 8 London boasts average single life pot size, 35% higher than UK average East of England next largest with average annuity pot of 87,295 Northern Ireland has smallest pots in UK Product Innovation 10 Drawdown sales rise as product innovation continues, up 73% annually Q2 Investment product innovation already underway, annuity products to follow suit from April Advice at Retirement 7 Gap between best and worst average single life annuity rate grows to 0.76% Gap could cause difference in annual annuity income of 13.7% Proportion of retirees securing an enhanced annuity up to 31% in September Releasing Equity in Retirement 11 Over 55s have property wealth of 2.1 trillion Equity release sales made via advisers up 7% in last 6 months vs previous 6 months Rising house prices boost average initial lump sum release by 19% in last year Conclusion 12 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. The data does not include those who do not secure an annuity via an adviser. 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.
www.iress.co.uk 4 Section 1: Product Demand Annuity demand stabilising The changes announced in the Budget caused an immediate change in behaviour among many prospective annuitants. A number of those who would ordinarily have annuitised smaller pots instead looked to access their savings. Meanwhile, many immediately delayed their decision to annuitise to understand more about the extent of their broader options, with the prospect of impartial guidance next year further contributing to the argument for postponement of any decision. As a result, demand for single life annuity products via advisers had fallen by 58.3% in e compared to the level at the start of the year. However, there are signs that demand is stabilising. In September, 10.5% more were sold than in ust, and while numbers are still far below their historic peaks (and indeed are 47.1% below their level a year ago), annuity sales have recovered by 14% since their trough in e. In total, there were 6.8% more annuities sold in the last quarter than in the second quarter, as many of those who saw annuitising as the most appropriate option were unwilling to delay for longer. While we expect some short-term volatility in demand, the last three months suggest that the annuity market may have already bottomed out, although April 2015 will provide another pivotal moment when free mass guidance becomes available. While the average size of an annuity may diminish in light of these reforms, as people incorporate multiple products, guaranteed income will remain an important strut in long-term retirement planning. Indexed Single Life Annuity Sales (April 2012 = 100) 160 140 120 100 80 60 40 Apr Oct Dec Feb Apr Oct Dec Feb Apr 2012 2013 2014 1. ONS Interim Life Tables, October 2013
5 Section 2: Outcomes for Annuitants Average income climbs despite annuity rates tumbling 3900 Average Standard Single Life Annuity Rates and Incomes 5.50% The average future income being secured through a single life annuity has climbed in the past quarter, reaching its highest level in more than a year. The average income being secured per pot climbed to 3,810 per year in September. This represents a 4.6% rise compared to ust, with income now 16.7% higher than a year ago, when the average stood at 3,265. 3700 3500 3300 3100 2900 2700 2500 Jul Sep Oct Nov Dec Jan Feb Mar Apr May Jul 2013 2014 Average Income (LHS) Average Rate (RHS) Sep 5.45% 5.40% 5.35% 5.30% 5.25% 5.20% 5.15% 5.10% While an increased average income is a positive development, the uplift is down to an increase in the average pension pot size rather than rapid improvement in annuity rates. Those who bought a single life standard annuity via an adviser in September did so with an average pension pot of 72,134, an increase of 4.9% on 68,779 in ust. This is 19.7% higher than a year ago ( 60,254), and represents a climb of 10.6% in the last three months alone. On the surface, much of the increase in pot size can be attributed to the ongoing impact of the relaxation of pension rules. We are seeing retirees with smaller pots deferring their decision or accessing their savings rather than annuitising via a financial adviser, and this trend is underpinning the average pot size of annuitants. Average Pension Pot Size for Single Life Annuity 75,000 70,000 65,000 60,000 55,000 50,000 45,000 40,000 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 Q3
www.iress.co.uk 6 Despite the improvement in pot size, average annuity rates are at their lowest in more than a year, falling to 5.28% in September, marginally down from ust (5.29%). Three consecutive months of falls have reversed a trend of slight improvement in the second quarter, when average rates reached 5.44%. The current level is a long way from the 2014 peak of 5.45% in January. 6.00% 5.80% 5.60% 5.40% 5.20% 5.00% 4.80% 4.60% 4.40% Jul Standard Single Life Annuity Rates Sep Oct Nov Dec Jan Feb Mar Apr May Jul Sep While the difference may look marginal, it can have a significant impact over the course of a retirement. A retiree with a pot of 100,000 would receive an annual income of 5,445, for a single life standard annuity at January s average rate. With September s rate, the same pot would generate 5,281. This 3% difference would equate to 4,090 less over a 25 year retirement. 2013 2014 Average Rate Average Best Rate Average Worst Rate A Bank Rate retained at record low levels has been a key influence over the failure of annuity rates to see a sustained rise this year, but falling 15 year gilt yields have also taken their toll. Annuity providers typically purchase these to back their annuity commitments. As they have trended downwards as the year has progressed, this has placed downwards pressure on annuity rates. Equally, as many providers wait until next year to unveil new product ranges or even come to market, competition is not strong enough to sustain an increase. Nevertheless, looking ahead to next year, an anticipated rise in interest rates along with increased competition among providers, should underpin rates.
7 Section 3: Advice at Retirement With annuity rates under pressure, shopping around to secure the best market rate is vital given the growing divide between the average best and worst rates. In September, the average best rate available for a standard single life annuity was 5.57%, compared to the average worst rate of 4.81%. Although this gap is smaller than that seen a year ago (93 basis points), it is higher than at the end of the previous quarter, and would amount to 549 per year for the average pot a difference in income of 13.7%. Difference between best and worst average standard annuity rates 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Jul Sep Oct Nov Dec Jan Feb Mar Apr May Jul Sep 2013 2014 The take up of enhanced annuities has continued to climb in the last three months. In e, 28% of those annuitising via an adviser declared a medical condition to secure some form of an enhanced annuity. This has risen to 31%, suggesting education at the point of advice continues to improve for those annuitising. 23% declare they are smokers, up slightly from the 22% in e, and 18% a year ago. One of the key benefits of advice in retirement is that consumers should be made aware of eligibility to particular products to suit their medical circumstances that in turn will boost retirement income. For instance, the average rate for a single life annuity for smokers is now 5.89%, 0.61% higher than for non-smokers. For an annuitant with the average pot size, this represents a difference of 11.5% in annual income, 438 a year. Over the course of a 25 year retirement, this amounts to an additional 10,950. It is vital that this process of education continues, and those who are eligible are able to benefit from an enhanced annuity.
www.iress.co.uk 8 Section 4: The Regional Picture Across the UK, the variation in income and accumulated wealth underpins strong differences in annuity pot sizes. London inhabitants boast the largest annuity pots, with an average of 97,156, 35% higher than the UK average. The next largest is found in the East of England ( 87,295) and the South East ( 82,393). Those retiring in Northern Ireland continue to have the smallest pots ( 44,392). Region Average Pot Size in September ( ) London 97,156 South East 82,393 East Anglia 87,295 Midlands 56,178 South West 51,835 Scotland 50,982 Northern Ireland 44,392 North East 63,349 North West 77,249 Wales 62,988 UK 72,134 Average Pot Size in September ( ) 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 Anglia Midlands South West Scotland Northern Ireland North East North West Wales UK
9 UK Average 72,134 44,392 Scotland 50,982 Northern Ireland North East 63,349 77,249 North West 56,178 87,295 Midlands Wales East Anglia 62,988 South West South East London 82,393 51,835 97,156
www.iress.co.uk 10 Section 5: Product Innovation New options at retirement With the annuity market well below its historic level, in spite of the short-term improvement, drawdown has grown in popularity. The latest figures from the Association of British Insurers show that sales of drawdown products increased by 73.4% in the second quarter compared to the previous year. Many of these may be a temporary measure by consumers waiting to evaluate their full range of options from April 2015, but drawdown is likely to be an increasingly important component of retirement. This growth is likely to be underpinned in the long-term as new products come to the market as an alternative or addition to an annuity in retirement planning. As more investment and hybrid schemes are launched, and choice broadens, demand for this type of product is unlikely to dwindle, especially in light of the Government s decision to abolish the 55% tax on inherited pension sums. Nevertheless, it is not just investment products that are set to evolve. We anticipate similar product innovation and diversity in the annuity market next year, with several providers already indicating they intend to offer new, flexible ranges. This in turn is likely to sustain demand for annuities as part of a retirement plan, as demand continues to develop. Following the government s removal of the 55% tax on inherited pension sums, there could be an increase in demand for value protection annuity products, as any value protection lump sum will be tax free for beneficiaries on deaths before age 75.
911 Section 6: Releasing Equity in Retirement The growth of the market Given the changing at retirement landscape, it is important for consumers and advisers alike to get to grips with the full extent of a retiree s financial options. Alongside annuities or investment based solutions, equity release can play a role. According to our analysis of ONS (Office of National Statistics) data, over 55s in the UK for whom equity release is applicable currently have a property wealth of 2.1 trillion pounds, so it is clear that as a market, there is significant opportunity for expansion. Demand for the product has slowly increased. Sales made via a financial adviser climbed by 2% in September compared to ust, and have increased by 7% in the last six months compared to the previous half year. In the last twelve months, 3% more equity release products have been sold via advisers than in the previous twelve month period. This indicates that equity release demand has not been impacted in the way annuity demand has been, largely down to the age of consumers. While those at retirement or approaching are directly affected by the Budget s changes, the average age of someone releasing equity is 71 years old and will already be in their retirement. Lump sums grow in size as property prices increase At present, the average initial lump sum secured by those releasing equity from their property is 32,476, equivalent to 6.9% of the average house price of applicants. This lump sum is 18.8% higher than a year ago, reflecting the greater equity many possess following the recovery in house prices. In the last year, the average value of a property used to release equity has increased by 20.8%, rising from 388,646 to 469,664. While not necessarily universally appropriate, for those that are asset rich yet cash poor and need to supplement their income in retirement, equity release could be an option to consider. As property wealth increases, yet many consumers do not accumulate large enough pension pots to sustain their lifestyle or unlock their pension savings too quickly we could see demand for the product increase in the long-term. A key role of advisers will be to help consumers evaluate their assets whether property, savings or pension pots as a whole as they approach retirement.
www.iress.co.uk 10 12 Section 7: Conclusion Outlook Currently, almost every month brings a new policy development for prospective retirees, as the full implications of the changes announced in the Budget open up yet more avenues in policy to allow flexibility at retirement. More announcements are likely to follow. We may even see the Chancellor make further amendments in the forthcoming Autumn Statement. With this in mind, it s difficult to identify longterm changes in consumer behaviour. April will be a key turning point, when the vast majority of changes announced take effect and guidance is up and running in some form. There is yet no clear indication as to how widely utilised guidance will be. While the Chartered Insurance Institute s research revealed 92% of consumers say they are likely to use guidance, L&G s recent pilot saw a take up of guidance of just 2.5%. Given the increasing choice and responsibility, it s imperative that the number at retirement receiving advice or guidance is astronomically higher than L&G s pilot suggests.. For instance, for those electing to annuitise, as part of their planning, awareness of the variation in annuity rates not to mention eligibility for enhanced products is crucial. While we won t see demand for annuities return to its former glory, September s 14% increase in advised single life annuity sales since e suggests that sales are no longer in freefall. However, over the next year, the onus is on providers to adapt products to match the new flexibility retirees have and want, yet make them simple enough to be understood. In this process of ongoing education and familiarisation with new product options not to mention highlighting hazards like longevity risk advisers will play a central role.
Appendix Average pot size, annuity rate and income for standard annuitants (single life). Average Pot Size ( ) Average All Rate Average Income ( ) 13 57,560 5.11% 2,942 July 13 57,940 5.27% 3,053 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 14 65,232 5.44% 3,552 Jul 14 65,285 5.43% 3,544 14 68,779 5.29% 3,642 Sep 14 72,134 5.28% 3,810
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