Annuities Demand Climbs Back After April Low As Rates Rise

• Average rates have risen to a six month high, pushing average incomes up 10% compared to March
• Annuity demand in June climbed 32% compared to April, but is still 36% below the level seen two years ago
• Recovery in demand in May and June follows April’s slump, which saw sales of single life annuities fall to their second lowest level on record
• The average pot size also increased at the end of Q2, rising by 3% compared to March 2015
• The gap between the best and worst rates available now stands at 81 basis points

Recent annuity rate rises spurred an increase in annuity sales following April’s near-record low in demand, according to the latest At Retirement Report by IRESS, the leading supplier of innovative technology for wealth management, financial markets and the mortgage industry.

Analysis of data from over 150,000 advised single life annuity cases found that annuity sales recovered somewhat in the last two months of the second quarter, after falling to their second lowest level on record in April. Annuity demand in June was 32% higher than in April. In fact, activity was up on an annual basis, climbing by 14% compared to June 2014.

This follows the immediate impact of pension freedoms coming into power in April, which saw demand in April fall 7% compared to March 2015, and by 30% year on year. Since 2012, demand had only been lower in December 2014. Despite the improvement in May and June, activity remains well below the level seen before the pension flexibilities were announced, and 36% below 2013 levels.

Rising annuity rates played their part in the increased demand in May and June, following April’s slump. The average rate for a single life annuity reached a new six month high in June 2015. It now stands at 5.09%. This is 23 basis points higher than rates seen in March (4.86%), as improving economic data and an increasing likelihood of rate rises impacted gilt yields.

Alongside improved rates, average pot sizes have risen. Overall, the average pot at the end of the second quarter of the year stood at £67,504, representing a 5% increase compared to March and a 3% increase compared to the same month in 2014. Due to the more positive outlook across both rates and average pension pot sizes, average incomes for those choosing to annuitise also rose by the end of the second quarter. In June the average income stood at £3,438, 10% higher than the average income secured in March 2015.

Finding the best deal

Shopping around for the best deal can save retirees thousands of pounds over the life of an annuity, given the gap between best and worst rates on the market. This gap is increasing, rising to 81 basis points in June, up from 78 basis points at the end of Q1. The average best rate for June 2015 stood 5.4%, compared to the average worst rate of 4.6%. For the average pot size in June, the difference between best and worst rates equates to £549 per year in income and £13,713 over a 25 year retirement.

Reduced awareness of enhanced annuities also remains a cause for concern. By the end of March sales of enhanced annuities accounted for one in three annuities yet by the end of June this had fallen back to 17% of all annuitants.

Dave Miller, Executive General Manager, Commercial at IRESS, commented: “Pensions Freedom Day hit annuity activity hard in April, as those at retirement rushed to explore alternative options. In the months that have followed, the mini-bounceback points to demand stabilising, buoyed by improving rates. However, with further changes in the market on the cards – not to mention new investment and hybrid products likely to launch – we have not seen the end of disruption and innovation in the retirement market.

“For those considering annuities, a rate rise bodes well, and as we head towards a more normal interest rate environment, we should see this trend continue in the longer-term. This will underpin demand from those looking for a form of guaranteed income. 

“However despite rates rising, it is clear that shopping around remains a key issue for consumers, given the growing gap between the best and worst rates. On top of this, there is still more work to be done on promoting consumers’ eligibility for enhanced annuities. Enhanced income as a result of a medical condition is a key attribute for annuities, and improving consumer awareness of this will be crucial to the long-term take-up of annuities.