Prudential pulls out of the annuity market
Prudential has announced it will not offer its annuities on the open market and in future will only offer them to existing customers. After the recent merger of Just Retirement and Partnership, this latest move provides further evidence that the number of annuity providers is shrinking.
There are now around 10 main players in the market, including Aegon, Aviva, LV=, Scottish Widows and Retirement Advantage. Prudential previously flagged up its intention to withdraw on the grounds that the new stricter Solvency II rules for pension providers make it harder to run the business profitably.
The worry is that, with fewer annuity providers offering products in the open market, more and more investors may end up bypassing the shopping around process and simply buy an income from their existing provider.
Recent research from Citizens Advice showed that seven in 10 investors are not shopping around when sorting out their retirement income.
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Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: "Demand for annuities has now stabilised, and has even started rising again in recent months. However, far too many investors are still missing out on the best income for their needs because they aren't shopping around.
"Since the launch of pension freedom, more and more investors are arranging their income directly with pension providers, usually without taking advice. It is imperative therefore that everything possible is done to help them find the best possible deal."
Previously the Financial Conduct Authority (FCA) had found that 80% of annuity investors could benefit from shopping around at retirement.
This is supported by data from Hargreaves Lansdown, which shows that the average difference between the best and worst rates on the open market in May 2016 was 22.1%
The FCA has already set in train various requirements. For example, pension providers are required to produce an annuity ranking so that consumers can identify whether they are getting a good deal. They are also required to participate in the development of the pension dashboard.
In response to the FCA's current consultation on the secondary annuity market, Just Retirement has suggested that retirees considering trading their annuities should be obliged to go through a Pension Wise guidance consultation first.
Stephen Lowe of Just Retirement says: "We share the FCA's concerns about the risks of poor outcomes when people don't understand the true value of the annuity income they are giving up.
"What is needed is a 'sense check' before anyone makes a decision and we think that Pension Wise is perfectly placed to deliver this.
"In most cases annuities work well because retirees need a stream of income to sustain them. But that's not always the case - circumstances do change and plans need to be changed.
'We see the secondary annuity market as most useful for those who can afford it because they have other income sources and who are likely to be taking advice."
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.