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Asset supervisor Commonplace Life has launched a pension annuity product, in one other signal that the fastened revenue market has been rejuvenated by greater rates of interest.
Pension annuities, which permit retirees to purchase a steady revenue for all times with some or all of their pension financial savings, have change into extra well-liked over the previous 18 months as rates of interest enable them to supply greater ranges of revenue.
“Annuities are more and more higher worth, with present charges bettering by 20 per cent up to now 12 months, as of June 2023,” mentioned Commonplace Life’s managing director for particular person retirement, Claire Altman.
Its analysis recommended three-quarters of individuals mentioned they needed “revenue certainty” in retirement at a time when the financial outlook remained unclear, she added.
The annuities market was hit in 2015 by the Pensions Freedom Act, which ended any obligation for retirees to purchase the fastened merchandise with their pension pot. After the monetary disaster, low rates of interest saved annuity charges down and lots of savers moved to “drawdown” merchandise during which their financial savings had been invested within the inventory market and topic to its fluctuations.
For the reason that finish of 2021, rates of interest have elevated from near zero to greater than 5 per cent in lower than two years. Some annuities, often known as enhanced or impaired annuities, now supply charges of over 8 per cent for retirees whose well being is classed as “poor”, based on mypensionexpert, a pension recommendation web site.
Gross sales of annuities have elevated sharply over the previous yr as UK savers search for assured revenue amid an unsure macroeconomic image. Some £2.3bn of lifetime annuities had been offered within the first half of 2023, up from £1.7bn for a similar interval in 2022, based on the Affiliation of British Insurers.
Commonplace Life provided annuity providers on the open market till 2017, when it changed it with a multi-asset technique for retired traders. Different insurers, akin to Prudential, additionally stopped providing the merchandise.
In 2019 Commonplace Life was fined £30mn for mis-selling annuities to prospects over the telephone between 2008 and 2016. The Monetary Conduct Authority claimed the corporate failed to inform prospects with well being issues that they might have purchased a greater “enhanced” product elsewhere.
Some business figures welcomed the Edinburgh-based firm’s entry into the business on the idea that elevated competitors would profit traders. The market is dominated by insurers akin to Aviva, Canada Life and Authorized & Common.
“Commonplace Life’s re-entry offers a great addition to the annuity market and provides additional option to these in want of a assured revenue in retirement,” mentioned Helen Morrissey, head of retirement evaluation at Hargreaves Lansdown.
“The surge in annuity charges we’ve seen over the previous 18 months has reinvigorated the market . . . Elevated competitors from such a widely known identify ought to assist drive greater incomes for retirees and profit the annuity market as a complete,” Morrissey mentioned.
The funding platform mentioned the variety of quotes issued for annuities, that are calculated based mostly on components akin to age and well being, surged by greater than 120 per cent within the 12 months ending July 2023 towards the yr earlier than.
“An annuity does imply that you’re forgoing the possibility to get excessive returns by retaining your belongings invested in equities or in greater return types,” mentioned David Sturrock, a senior analysis economist on the Institute for Fiscal Research, a think-tank.
He however cautioned that some traders may misjudge the returns from an annuity by underestimating their lifespan. In an period of upper inflation, retirees wanted to look past the headline revenue determine and contemplate inflation safety, he added.
“Annuities not linked to inflation could possibly be much more of a priority if inflation goes to be excessive for an prolonged interval,” he mentioned. “The preliminary revenue you’d get from a non-inflation listed annuity shall be greater however that can come at the price of decrease revenue sooner or later.”