We are in the reporting season for insurers to tell us how many of their products advisers sold in the first half of 2023. One of the first to report was Just, which announced individual annuity sales were 54% up at over £470m.
I find Just’s numbers especially relevant as it sells mainly through advisers and doesn’t have a back book of existing pension savers who can function as a flywheel – keeping sales flowing in whatever the conditions.
The size of the right pension pot needs to be not too small, not too large but just right
The cumulative effects of Brexit, war in Ukraine, former prime minister Liz Truss and the cost of living crisis have pushed up long-term interest rates, in turn improving annuity incomes.
A 65-year-old retiree can now get an annuity yielding around 7% of their pension pot. While many will agree that’s attractive, we still need to ask the question, ‘who is the right sort of person to be buying an annuity?’. My thoughts are encapsulated in the table below:
| Pot size | Annuity value | What to recommend | Rationale |
| Below £25,000 | Up to £30 per week | Cash it in | At only 15% of the state pension, this is too small to make a difference to regular living costs. Better to put it in the building society as a rainy day fund. |
| £25,000 to £100,000 | Up to £130 per week | Level annuity | This is a good income, and the annuity will boost living standards throughout retirement. Level is OK here as the state pension now provides £200 per week and rises at least with inflation each year. |
| £100,000 to £250,000 | Up to £330 per week | Mix and match some annuity with some income drawdown | With state pension smaller than the private pension, inflation protection is important. But increasing annuities are very expensive, so it’s better to mix a level annuity with an income drawdown plan holding growth assets. |
| £250,000 to £1m | Up to £1,300 per week | Sophisticated blending of annuity and drawdown | There are some great tools available that enable an adviser to ‘mix and match’ annuity and drawdown in a way that accurately reflects the client’s risk profile. Adjust the blending over time as the client ages. |
| £1m to £5m | Up to £6,000 per week | Income drawdown | The super-wealthy can self-insure against living too long. Planning for inheritance and getting the money out of the pension at a bearable tax rate are the key considerations for this group. |
Finding the right client for an annuity is a little like Goldilocks and the Three Bears. The size of their pension pot, or combined pots, needs to be not too small, not too large but just right.
As ever, the value of a financial adviser is that they can tailor a rule of thumb like my table above to fit the actual needs of a particular client.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
Several decades ago Mercers advised, as a general rule, against IncDD unless the retiree had an amount at least equal to his pension fund in cash savings and unfettered investments, with a minimum of £150k. The above pot size bands are broadly consistent with that and a useful guide towards the most appropriate strategy but make no mention of other savings and investments.
The trouble is that because annuity rates were so terrible for so many years, whilst equity and bond funds were powering ahead, many advisers came to regard IncDD as the default option. Who wanted to be locked in for life to an inflexible annuity? Er ~ how about a temporary annuity whilst leaving the balance of the fund invested (without drawing on it)? Anecdotally (so I may be entirely wrong) temporary annuities are very much under-utilised.
The starting point for a lifetime annuity should, I suggest, always be to investigate an underwritten one to reflect any medical conditions likely to impair life expectancy.
And now, as they always do sooner or later, things have changed. Investment markets have declined and don’t look much like recovering any time soon, whilst interest and thus annuity rates have largely recovered. Those in IncDD can of course buy an annuity but how much damage has their fund suffered over the past few years?
It’s a very tricky path for advisers to tread.