Investors shun annuities

The number of pension investors choosing to buy an annuity has fallen sharply in the past month as those approaching retirement defer taking income in the hope that stock markets will recover.

Pension holders who were heavily invested in equities may have seen their fund value drop by as much as 40 per cent in recent months as markets have suffered large losses. So, if they converted their funds into annuities now, they would receive a considerably lower income than they would have done earlier this year.

As a result, more investors are leaving their pension funds invested in the market through income drawdown schemes rather than lock into annuities while asset values are so low.

“We are having conversations on a daily basis with clients wanting to opt for drawdown rather than take income straight away,” said Laith Khalaf, pensions analyst at Hargreaves Lansdown.

Standard Life estimated that annuity business had fallen around 15 per cent since September, while Prudential said there had been “some easing” in the market. Annuity Direct, a broker, said it had seen less demand from pension investors in income drawdown schemes who could afford to delay taking benefits.

Advisers said the investors most likely to defer taking their retirement income were those with high exposure to managed funds and equities, many of whom no longer had the pension fund they had hoped to retire on.

“Some people may want to sit it out, particularly those who were heavily invested in equities,” said John Lawson, head of pensions policy at Standard Life. “If their fund goes back up by 10-15 per cent, it could be worth it.”

Khalaf said some clients, mainly those who had other sources of income to tap into, were deferring taking their retirement benefits altogether. Others were choosing to take their allotted 25 per cent of tax- free cash to fund their expenditure for a couple of years, while leaving the remainder of their funds invested in the markets.

Advisers emphasised that delaying buying an annuity was not without risks. Markets could fall further, or at least fail to recoup much of the recent losses, and annuity rates could also start to fall.

“If someone does delay taking an income they will not necessarily be in a better position,” explained Khalaf. “Any market recovery could be offset by lower annuity rates.”

Annuity rates have risen to their highest level for six years in recent months but are now generally expected to fall. Bond yields, which determine annuity rates, have already started to come down as a result of higher investor demand and some annuity providers, including Canada Life, Legal & General and Norwich Union, have cut their annuity rates to reflect these changes.

Billy Burrows of William Burrows Annuities did not believe annuity rates would fall drastically but thought they were likely to drift downwards over the next few months.

So he suggested pension holders who had been invested in cash and therefore protected from the market falls should purchase annuities at current levels.

Meanwhile, those with managed funds who have seen the value of their pension fall must weigh up whether to buy an annuity now, while the preferential rates are still on offer, or wait until markets recover at the risk of annuity rates worsening.

Investors who want some security but do not want to miss out on any market bounce could opt for the middle ground. Stuart Bayliss, managing director at Annuity Direct, said investment-linked annuities, where the income fluctuates according to stock market movements, had become more popular.