Pension Freedoms, introduced a decade ago, increased retirement flexibility but also added complexity in choosing retirement income options, resulting in a growth in drawdown usage.
The industry emphasises ongoing innovation to ensure retirees select suitable products, particularly given the decline of defined benefit pensions.
Phased annuitisation is emerging as a strategy to balance income security and flexibility. Annuity sales fell initially due to low-interest rates but saw a resurgence, increasing by 46 per cent in 2023, driven by rising interest rates.
According to experts, annuities remain valued for income certainty, although they are not expected to become the default option for retirees.
Standard Life head of annuities Pete Cowell says: “Pension Freedoms immediately transformed the retirement landscape on their announcement a decade ago. The freedom, flexibility and choice, they introduced also put the onus firmly on people to make choices regarding their retirement income and led directly to a growth in drawdown, alongside the complexities that come with calculating how long your money needs to last.
“The 10th anniversary of these reforms serves as an important reminder of how much work there is still to do as an industry to make sure people are getting into the right product or product mix at the right time. For many, this may involve an element of guaranteed income, particularly amid the continued decline of defined benefit pensions.
“There is also a growing understanding that retirement income planning shouldn’t follow a ‘once-and-done’ approach. The concept of annuitising in stages is emerging as a strategic approach for many retirees seeking to balance income security with flexibility. By purchasing an annuity in tranches throughout retirement, individuals can receive an income in retirement which is aligned to their risk appetite, with the element of guaranteed income increasing over time.
“The option to combine retirement income solutions is also coming to the forefront, following a more blended approach of both drawdown and annuities to offer the best of both worlds – certainty and security as well as flexibility and potential growth.
“While the combination of newfound freedoms and a period of low interest rates saw annuity sales fall, the fundamental customer need they met never went away and income certainty is something 9 out 10 say is important to them in retirement.[1] Rising interest rates over the last two years have led to a resurgence of annuity interest.
“The ABI’s latest annuity data which shows the annuity market increased by 46 per cent in 2023. Improving rates have also played a role, with the average annuity rate in February 2024 for a healthy 65-year-old was c6.89 per cent. While annuities are unlikely to go back to being the default income option for the majority of retirees anytime soon, their return tells us just how much people value peace of mind.”