At Retirement Report Edition Five, ust 2015 www.iress.co.uk
Contents Foreword 2 Executive summary 3 Annuity demand recovers following il slowdown 4 Rate rises support retirement incomes 5 Consumer inertia with shopping around proves costly 7 Enhanced annuity take up takes turn for the worst 8 Regional variations 9 Equity release continues its rise 11 Outlook 12 Appendix 13
www.iress.co.uk 2 Foreword In our last At Retirement Report, we focussed on the immediate, and potentially, kneejerk reactions from consumers after the pension freedoms were implemented in il 2015. Now the dust has settled we can begin to make a true assessment of the impacts the reforms have had. The market has come to terms with the fact that annuity demand is unlikely to exceed previous highs seen towards the end of 2013. However, demand for single life annuities looks like it is starting to bottom out and showing signs of returning to the patterns of seasonal demand seen in previous years. The Association of British Insurers (ABI) found in the first three months, providers paid out almost 2.5bn in cash and income drawdown payments and have also noted more activity involving the under 65s than initially expected. However, for all the worries of sales of Lamborghinis going through the roof, the majority have only cashed in relatively small pots, making up a tiny proportion of all the money which could have been released. This demonstrates the British public are taking a more considered and sensible approach. IIn this edition, we highlight how the importance of shopping around is still overlooked by the Government, as the difference between the best and worst annuity rates continues to grow for both single life and enhanced annuities. With the stakes so high, it is no surprise that many people need help navigating their way into retirement. We also review how annuity rates continue to remain strong, pot sizes are growing and equity release is being taken seriously as an important source of retirement income. We hope you enjoy reading this latest edition of the report. Andrew Simon Executive General Manager, Product, IRESS 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 has been sourced from The Exchange, and analysis 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.
3 Executive summary Annuity demand slows as seasonal trends return 0 Sales of single life annuities fell to the second lowest level on record by September Annuities remain a valid option to mitigate risk or guard against running out of money in later life Volatility throughout 2015 reducing following the wide variations seen throughout 2014 Average incomes show signs of recovery after y dip 0 The average income secured by annuitants shows signs of recovering Average income secured per pot at the end of the third quarter stood at 3,379 Average rates for a standard single life annuity remained relatively constant over the third quarter Rates favour the savvy shopper 0 The gap between the best and worst rates available continues to grow and by the end of the third quarter reached 82 basis points (5.45% compared to 4.62%) Up from a gap of 81 basis points in e and 76 basis points at the same time last year Difference in best and worst rates equals 548 per year in income and 13,709 over a 25-year retirement Enhanced annuity take up reaches record high 0 Sales of enhanced annuities reached an all-time high in ust Average income secured by an annuitant who smokes is 7% higher than by a non-smoker Gap between the best and worst rates for declared smokers reached 136 basis points by September Equity release becomes a valid source of retirement income 0 The UK housing market is showing signs of renewed acceleration, amid strong demand and lack of supply Average initial lump sum released via equity release increased by 50% when compared to Q2 2015, average sum released in the quarter reaching 64,360 As the housing market continues to grow equity release is likely to become even more favourable as a way to unlock retirement income Outlook 0
www.iress.co.uk 4 Section 1: Annuity demand slows as seasonal trends return The highly anticipated pension freedoms have been in place for six months and consumers have now had a greater chance to digest the changes and their their new-found options when it comes to accessing their pots and funding their later lives. The immediate impact of the unprecedented level of choice was documented in the last IRESS At Retirement Report and the changes continue to be felt. However, the latest findings are suggesting seasonal trends are emerging. Following the decline in sales of single life annuities seen in the second quarter we have seen this trend continue, with demand falling to the second lowest level on record in September. By the end of the third quarter demand had fallen 32.64% compared to a year ago. Similarly demand in the third quarter fell 32.61% compared to the previous quarter. However this short-term fall is heavily linked to expected seasonal trends, with the market tending to slow over the summer period. Indexed single life annuity sales (il 2012 = 100) Equally, we won t see the true picture of the new normal until interest rates normalise. At present even minor declines in annuity rates are having a disproportionate impact as we shall see in the following section. When rates are rising consistently this dynamic will change. However, looking at 2015 as a whole we are also seeing volatility reducing following the wide variations seen throughout 2014. il s reforms have inevitably redrawn the at retirement market, moving from providing consumers with far more choice than ever before. So, while we are starting to see signs of the market returning to the norm - albeit it at a lower level - the sale of annuities continues to be affected by the increasing popularity of Income Drawdown. The ABI reported that the number of people who have made some kind of drawdown arrangement since the freedoms came into effect could be three and a half times as many as previously expected. Due to the increasing number of products available to those approaching retirement, it is unlikely we will see the demand for annuities rebound to the highs seen at the start of 2014, due to annuities taking their place in a new and uncharted market. But with signs indicating the market is returning to previous seasonal trends and a new normal, these figures demonstrate how annuities remain a valid option for many who want to mitigate risk or guard against running out of money in later life. 160 140 120 100 80 60 40 20 0 2012 2013 2014 2015
5 Section 2: Average incomes show signs of recovery after y dip The average income secured by those who chose to annuitise over the third quarter remained relatively constant, following the improving trend seen by the end of the second quarter. The average income secured per pot at the end of the third quarter stood at 3,379, only a 2% drop since the end of the second quarter, although this was 13% higher than the level seen in y. The levelling in incomes is being fuelled by annuity rates remaining strong and average pension pot sizes rising. Following the rise of rates seen in the second quarter, the average rate for a standard single life annuity dropped slightly on a quarterly basis. By September the average rate had dropped by 0.01% since e to 5.08%, although rates had improved slightly in ust and September. A 100,000 pension pot would receive 5,081 per year, with the rate seen in September equalling 127,028.57 over an average 25-year retirement. Over the quarter the slight decrease in annuity rates was linked to the flattening of gilt yields, as uncertainty over the macro economic environment took hold, and the prospect of any interest rate rise became more distant. The impacts of Black Monday and the ongoing concerns around China may push prospective retirees to reconsider the volatility involved in investment backed retirement options, which may provide a short term boost for annuity demand and potentially rates. Equally any interest rate rises in 2016 will increase the value of any annuities purchased by consumers. Average standard single life annuity rates and incomes 4,500 5.50% 4,000 3,500 5.30% 3,000 2,500 5.10% 2,000 1,500 4.90% 1,000 4.70% 500 0 4.50% Sep May Sep 2013 2014 2015 Average income (LHS) Average rate (RHS)
www.iress.co.uk 6 All of these are triggers that could help to stimulate long-term demand for annuities as the returns available throughout their lifetime become more favourable. The average pot sizes for those choosing an annuity have also played a central role in seeing incomes showing signs of recovering. The variations seen in pot sizes remained relatively stable across the quarter and dropped just 1.5% compared to the figures seen in e, although the size increased as the quarter progressed, following a low point in y. This indicates the trend of those with larger, more substantial pots choosing an annuity remains true, as they look to secure a guaranteed income for life rather than opting to draw the income down as a lump sum. In September those opting to purchase an annuity via their financial adviser did so with an average pension pot of 66,500. Overall, the average pot size for the third quarter of 2015 stood at 66,500, 9% lower than the average for the second quarter, yet 7% higher than the historic lows seen in the final quarter of 2014. Average pension pot size for single life annuity 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Sept May Sept May 2013 2014 2015
7 Section 3: Rates favor the savvy shopper As always, when it comes to buying an annuity it is essential to shop around to secure the best rate available. The increasing gap between the best and worst rates available to the savvy shopper was documented in the last report and has continued to grow as annuity rates have stabilised. By the end of the third quarter the gap had reached 82 basis points (5.45% compared to 4.62%). This is up from a gap of 81 basis points in e and 76 basis points at the same time last year. Difference between best and worst annuity rates 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Sep May Sep May 2013 2014 2015 Standard single life annuity rates When addressed in relation to the average pot size for September, the difference between the best and worst rates equals 548 per year in income and 13,709 over a 25-year retirement. When deciding on how to utilise their pension pot following il s reforms it is crucial that consumers don t focus on simply choosing which type of product is best for them. Once chosen, it is imperative they then take the time to compare the individual products in that category available to them across the market. For instance, taking the time to shop around for the best deal on an annuity can save thousands of pounds over its duration, and it is becoming all the more important. Despite attempts to encourage all savers who are approaching retirement to shop around for an annuity, the ABI have shown almost a third failed to do so, tying them into a lower income for life. Research from JLT Employee Benefits calculated pensioners have missed out on up to 5bn of annuity income, simply by failing to shop around for the best deal in the market. 6.00% 5.80% 5.60% 5.40% 5.20% 5.00% 4.80% 4.60% 4.40% Sep May Sep MAy 2013 2014 2015 Average rate Average best rate Average worst rate
www.iress.co.uk 8 Section 4: Enhanced annuity takes up reaches record high After the concerns around the take up of enhanced annuities documented in the last report, awareness of the benefits of enhanced annuities has recovered and by the end of September they accounted for one in three purchases. In fact in ust the sale of enhanced annuities reached an all-time high at 37% of annuitants. For the average size pot, an annuitant who is a smoker will secure an average income of 3,680 per year 7% higher than the income of a non-smoker. As with a standard single life annuity, for those opting to purchase an enhanced annuity there are benefits to be found by shopping around. The gap between the best and worst rates for declared smokers in September 2015 stood at 136 basis points, compared to 82 basis points for nonsmokers. Financial advisers remain crucial when it comes to educating and advising the consumer if they are eligible for an enhanced annuity and if so, the increased benefits available to them. In an environment where the consumer has never had more choice, yet at the same time never been more confused, it is essential that both advisers and the Government take steps to ensure the enhanced annuity message is readily available to consumers via all platforms.
11 Section 6: Equity release becomes a viable source of retirement income Since the last At Retirement Report, the average initial lump sum secured by those releasing equity has increased by 50% when compared to the previous quarter, with the average sum released in the quarter reaching 64,360 compared to 42,914 in Q2 2015. The UK housing market is showing signs of renewed acceleration, amid strong demand and a lack of supply. Equity Release Council figures have shown record first half growth in equity release lending, increasing by 11% from 641m to a record high of 710m. As many look to take advantage of rising prices, equity release is becoming an important vehicle for those looking to fund their retirement, with a third of those over 55 now considering their property wealth as part of their retirement financial plan. As the housing market continues to grow, with demand rising and supply stalling, it is likely that equity release will become even more favourable as a way to unlock retirement income to obtain lifestyle choices and goals. Moving forward, advice will be essential in ensuring that those who opt for this method are aware of all the facts.
www.iress.co.uk 12 Outlook The last three months have seen the annuity market showing signs of stabilising, as consumers have had a greater chance to understand their options. Demand for annuities is still falling but not nearly at the same rate seen in the immediate aftermath of the freedoms. It suggests the market is bottoming out and potentially returning to seasonal norms, in what is undeniably a new retirement landscape. It will not be until we see any rise in interest rates in 2016 that we will know for sure what part annuities play within this new market. However, many are still playing the waiting game when it comes to opting for their choice of retirement income vehicle, as there are still impacts set to filter through into the market. The effects of the merger between two of the largest players in the annuity and retirement income market, Partnership and Just Retirement, have yet to be felt. With one less provider in the market, the level of competition could drop slightly, impacting the rates available to those looking at taking an annuity, and there remains market uncertainty regarding how this could influence future capital investment in product innovation. ket events such as Black Monday reinforce how by purchasing an annuity, consumers are reducing their exposure to swings in the market and look to guard against running out of money in later life. Many might look to combine the benefits of a couple of products, such as drawdown and annuities, via blended products to ensure they can achieve their changing lifestyle goals across their retirement. In the ongoing and ever essential world of education and familiarisation with new financial products, advisers will continue to play a central role in providing advice and guidance to consumers. With more options than ever available to those approaching retirement it has never been more important for advisers to be armed with all the information to share and advise their clients. The Chancellor s announcement in y of a consultation on tax breaks means this tax year may well be the last one when consumers can still get the additional-rate topup. With the underlying aim of the consultation being to tackle the rising costs of encouraging people to save for retirement, many will be waiting for the outcomes of the report before making any decisions around their retirement.
13 Appendix Average pot size, annuity rate and income for standard annuitants (single life). Average pot size ( ) Average all rate Average income ( ) 2013 13 57,560 5.11% 2,942 y 13 57,940 5.27% 3,053 13 58,085 5.35% 3,107 Sep 13 60,254 5.42% 3,265 13 57,707 5.35% 3,087 13 60,145 5.35% 3,215 13 57,535 5.45% 3,136 2014 14 55,575 5.45% 3,026 14 54,745 5.44% 2,980 14 53,516 5.42% 2,902 14 59,368 5.43% 3,223 May 14 63,158 5.42% 3,426 14 65,232 5.44% 3,552 14 65,285 5.43% 3,544 14 68,779 5.29% 3,642 Sep 14 72,134 5.28% 3,810 14 57,765 5.24% 3,027 14 59,842 5.23% 3,127 14 58,455 5.17% 3,019 2015 15 70,898 4.89% 3,465 15 68,827 4.89% 3,369 15 64,036 4.86% 3,112 15 71,967 4.84% 3,484 May 15 67,888 4.97% 3,375 15 67,504 5.09% 3,375 15 58,011 5.12% 2,972 15 64,455 5.06% 3,262 Sep 15 66,500 5.08% 3,379
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