Annuity purchases set to bounce back - if the price is right

Currently, only 12 per cent of people are buying an annuity. However, 43 per cent of those who are approaching retirement do envisage buying one, according to new research from Hargreaves Lansdown. 

The pension freedoms were created at a time of low interest rates and the start of retirement for the  baby boomer population bulge - who were also increasingly inclined to take a phased approach to retirement rather than simply stopping work overnight, and so needed a more flexible way to take retirement income. The research suggests that investor demand for annuities is likely to remain subdued in the short term but could double in size by the mid-2020s. 

According to Hargreaves, almost half of those who envisage buying an annuity would do so if they get a rate of income of 6.5 per cent – that’s a payout of £6,500 a year for every £100,000 invested. However, 40 per cent would only buy an annuity if the available rate was 8 per cent or more.

Nathan Long, senior pension analyst at Hargreaves Lansdown, says: ‘The relatively abrupt introduction of pension freedoms, coupled with low interest rates and the surge of baby boomers hitting retirement, resulted in a short-term dash for cash. As these investors move later into retirement, their appetite for the security of a guaranteed annuity income is likely to increase.’ 

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He argues that there is still plenty of latent demand for annuities, but discerning investors won’t buy at just any price. ‘Our research shows investors are price-sensitive and that as they get older they are more likely to value the simplicity and security of a guaranteed income.’

Claire Trott, head of pensions strategy at Technical Connection, adds: ‘It isn’t surprising reading that some of those who have opted initially for drawdown in retirement will eventually buy an annuity and will want to do so at the right price. Shopping around and buying at the right time is key to most things in life.’ 

She argues that pension freedoms have ‘led annuities to look bad value and inflexible, which in some cases they are, but they still have a place in the retirement landscape and shouldn’t be discounted’. 

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