PPI calls for more annuity market data

The Pensions Policy Institute (PPI) has called for more data on the annuity market so that the industry can assess how people can use a guaranteed income to optimise their retirement income.

Its Briefing Note 130: Set for life? – Guaranteed incomes in retirement found that the data around the purchase of annuity was lacking in several areas and more would be needed on the effects of gender, ethnicity, family and housing to determine people’s attitudes and behaviours towards the retirement product.

The report stated that whilst there had been a rise in the number of people purchasing annuities in later life, many people are reluctant to buy annuities because they do not understand them.

It noted that amid the introduction of pensions freedoms when people were starting to have to make active decisions about what to do with their pension pots, it was evident that people with DC pension pots had little detailed understanding on annuities.

The PPI also reported that, after the initial fall in 2014 following the introduction of pensions freedoms, the number of annuity purchases in the UK has remained steady since 2016, reaching 166,000 purchases in 2020/21.

It was also stated that more smaller pots (under £10,000) were being used to purchase annuities, with their use making up 16 per cent of annuity sales in 2016/17 before rising to 23 per cent in 2020/21.

The PPI suggested that this increase could result from pot segmentation, whereby people retain a portfolio of small pots, assigning different uses to each one, or it could be that people are combing multiple small pots and purchasing annuities with them.

PPI senior policy researcher, Mark Baker, commented: “There is no doubt that guaranteed retirement income products will continue to play a role in the retirement landscape, but their significance and use will change.

“This represents a challenge and an opportunity for industry; as pot sizes increase and people may become more engaged with their workplace pensions, new products and options could be developed and more widely used.

“In order for the market to respond well, more understanding of how factors including gender, ethnicity, family and housing determine people’s attitudes and behaviours will be necessary as we currently have very little evidence as to the roles that these factors play.

“Improved data on behaviour and attitudes collected at a national level will be a necessary building block for designing the future. PPI will publish a report in September 2022, which explores these issues in more depth and asks when the optimal time to purchase a guaranteed income might be for people with different characteristics.”

Hymans Robertson partner, Kathryn Fleming, added: “Annuities are often seen as one of the least popular of the pension freedom options, so it is fantastic to be able to support this PPI research and helping to raise awareness of where they can add value. An annuity can have an important role when combined appropriately with the other pension options as part of an individual’s retirement plan.

“This note, rightly, explores the key role annuities will play as DC pot sizes grow, education increases and the industry considers retirement options as a sequence of decisions, instead of a ‘once and done’ event. As an industry we are still on a journey to fully integrate the pension freedom options, ensuring that they maximise individual retirement outcomes. It is great to see the PPI point towards the ‘teachable moments’ along this journey, between age 50 and state pension age, where the industry needs to raise its game.

“In our experience from sponsoring this research, it is clear that there are some immediate learnings for the industry in how to raise awareness of the range of annuities available to savers. In particular, we must do more to highlight the value that can be offered when a retiree goes through a properly supported process to receive an underwritten annuity. There are also some positive signs that some retirees are recognising the role that an annuity can provide to maximise value and provide certainty when purchased later in life.

“Recognising that different retirees will have different wants and needs to be catered for, whether that is leaving money for loved ones, providing an income for life, or even managing tax, some creative but careful thinking around the role of annuities is likely to improve outcomes.”

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