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Pensions: are annuities making a comeback?
22nd September 2022
Pensions: are annuities making a comeback?
In recent years the annuity market has seen a significant decline. However as auditors of many pensions scheme we are seeing more of an appetite of trustees and scheme advisers to explore annuities as a way to satisfy the obligation of schemes to their members again. This may be due to rising interest rates coupled with inflation at rates not seen for decades. Here, we explore more about annuities, what’s influencing the come back and some things to consider when working with your scheme advisers before approaching insurers regarding your pension scheme.
What is an annuity?
An annuity is a pensions insurance policy that offers scheme members a guaranteed income for life. The rate paid is agreed when the annuity is purchased and can rise with inflation or stay the same, depending on the policy chosen.
The Freedom and Choice reforms in 2015, which gave people the option of dipping into their pension pots, had a significant impact on the annuity market. Many believed it would be the death of the annuity and the reforms had a noticeable impact on their popularity.
However, recently it appears that annuities are on the rise. Data published by the Financial Conduct Authority in 2021 showed an increase in pension plans buying annuities and it would appear that the general consensus in the industry is that annuities are now growing in popularity.
Annuities on the increase
As inflation and interest rates rise, the guarantees offered by annuities may be attractive for both scheme members as they provide certainty of income and to trustees of schemes to manage the financial commitments.
Providers have also begun to innovate their annuity offerings, with some creating hybrid annuities that combine a guaranteed income with the option to draw down in earlier years and switching to an annuity later in life.
Considerations
Before you consider the options available for your scheme you should always seek financial planning advice from the scheme investment consultant or an independent financial adviser. If you’re considering an annuity for your scheme, it’s key that you explore the variety of annuity options available and choose the approach that works best for your scheme. It’s also important to gather relevant data and benefit information ready for the transaction and ensure you put the right governance in place.
Aviva, Canada Life, Just Retirement, Pension Insurance Corporation (PIC), Rothesay, and Scottish Widows have recently collaborated with DLA Piper to develop an insurer-led best practice guide on Preparing Pension Schemes for a Bulk Annuity Quotation. The guide provides useful information for schemes considering annuities.
The Rowleys pensions team are pension audit experts. We work with a large number of pension schemes, taking a balanced, risk-based approach to audit. If you’d like to discuss your pension scheme accounts and audit requirements, then please get in touch.