In an era marked by economic uncertainty, high interest rates and an increasing longevity risk in retirement, guaranteed income solutions – such as annuities – have experienced a resurgence in popularity in recent years.
According to data from the Association of British Insurers (ABI), 2023 was a milestone year for annuity sales, which totalled £5.2bn – a 46% increase on 2022. This trend further continued in 2024, with sales of pension annuity contracts jumping a further 24%.
Annuity rates fell to an average of 4.7% in 2020 but the current income on offer is closer to 7.7% and has held up in spite of recent cuts to interest rates. The Financial Conduct Authority (FCA) notes the majority of advisers continue to recommend 4% drawdown from pots that remain invested for long-term sustainability.
As such, annuities continue to offer an attractive and secure alternative to drawdown, with a blended solution of the two options often offering the greatest flexibility and overall outcome for clients.
As more and more retirees turn to annuities to provide a secure income in their later years, the financial services industry is reacting to this in real time, innovating fast and reimagining what these products look like.
Bolstered by rapid advances in artificial intelligence (AI), the guaranteed income market is undergoing significant change, which, if channelled correctly, should continue to lead to improved retirement outcomes for the next generation of retirees.
The changing face of annuities
One key driver behind the surge in popularity of annuities is that modern-day guaranteed income products serve a much wider purpose than they once did. Today’s retirees have a diverse set of needs and annuities, in their various forms, can help solve a wide array of challenges in post-work life.
Top of the list for many is the income certainty annuities offer, providing a guaranteed income for the rest of your life, however long that may be. They can also take away the worry of investment risk, insulating a retirement pot from the volatility of global equity markets.
Contrary to many people’s perception, these products can also be adapted to people’s unique circumstances. Whether driven by the expectation of escalating costs associated with old age or concerns about the corrosive power of inflation, clients can choose to have their income increase over time in line with inflation, or as a defined percentage.
Clients worry they may lose the value of their pension savings if they buy a lifetime annuity and don’t live as long as they had expected. This is where joint life annuities and death benefits come in.
Value protection can be added to protect a chosen percentage of the pot used to purchase the annuity – up to the full value of 100%. Guaranteed payment periods are available and these benefits have become increasingly affordable in recent years.
Fixed-term annuities can be used to bridge income gaps between early retirement and the state pension age, or fund mortgages into retirement.
Blending an annuity with drawdown is another effective option for retirees. An annuity can be used to cover essential expenditure, leaving the remainder of the pot for investment and ongoing drawdown. This approach offers both flexibility and security, appealing to clients who want to manage market risk without sacrificing control.
And finally, with planned changes to bring pensions under inheritance tax in 2027 looming, there’s also growing interest in the use of annuities as part of inheritance planning, through gifts out of normal income.
By positioning these products as versatile tools rather than rigid solutions, advisers can better align them with their clients’ evolving needs.
The role of AI, data & technology
AI has undoubtedly been the buzzword of the past couple of years and, like many other financial products, guaranteed income is also benefiting from adoption of the technology.
Intelligent systems are being used to analyse vast amounts of client data to recommend personalised annuity solutions based on a person’s lifestyle, health, and financial goals.
Additionally, automation is streamlining the application process, reducing paperwork and speeding up decisions.
Advances in technology could soon help with the underwriting process too. The utilisation of digital health questionnaires that are integrated with medical databases can streamline data collection while maintaining the privacy of individuals.
Furthermore, AI models are being trained to identify patterns, detect anomalies, and flag inconsistencies with high precision within these complex datasets. By making this process less intrusive and more efficient, annuity products that need underwriting should become a more attractive option to consumers with certain health conditions who can often unlock higher income with annuities that are underwritten.
The role of the adviser
In a fluctuating financial and political environment, with complex products and a vast array of variations available, the role of the adviser will be key. This will mean working closely with clients to identify their financial needs and aspirations and ensuring that their goals are clearly articulated and understood.
Annuities are still a blind spot for many clients, especially among those for whom an annuity might be a viable product, where awareness of their benefits is low.
According to the FCA’s 2024 Financial Lives Survey, just over one in five (22%) of defined contribution (DC) pension holders who were planning to access their DC pension in the next two years said they’d never heard of a single life annuity.
While innovation is continuing at pace, there remains work to be done to increase awareness and understanding of annuities as a wealth planning solution.
So, for those advisers who might have fallen out of the annuity habit, reacquainting themselves with the new landscape will ensure that they can confidently position the benefits of annuities.
Carolyn Jones is a retirement director at Scottish Widows. The views expressed above should not be taken as investment advice.