Mike Morrison: When will we realise what we've done?

‘Another one bites the dust!’ A tenuous way to start an article I know, but it is in response to the news that another insurance company has decided not to continue in the annuity market (LV=). A good number of insurance companies have now pulled out of the market in 2016 citing, amongst other things, the Solvency II Directive and pension freedoms. I do wonder whether we will look back one day and realise what we have done.The pension freedoms were always going to have some unintended consequences. At the time they were considered by many as a political move more than anything else and were rushed through, with little time for the consideration of what they might do to the existing market.For those retirees with larger pension funds and a mix of financial resources, who can create a flexible income and then use inheritance tax opportunities, the pension freedoms have undoubtedly been a positive move. For those whom an annuity was probably the right solution, both before pension freedoms and after, the consequential changes to the annuity market might not be so welcome and the need for the ‘guarantee’ becomes harder to satisfy.I was at a conference recently where a ‘learned’ investment consultant tried to explain to the audience how sophisticated financial instruments could be used to synthesise an annuity and ‘guarantee’ an income over specific time periods. It was quite complex and probably quite pricey when compared with a traditional annuity – perhaps a better solution for some form of institutional decumulation strategy.Many of those embracing the new pension freedoms will still use annuities, perhaps by combining an annuity with income drawdown. But ultimately, any lack of choice and low rates will have a consequence. Due to falling interest rates (and probably less lives in the mortality pool) annuity rates have dropped. Industry research suggests the annual standard annuity income fell by 6.4 per cent and the average annual enhanced annuity income dropped by 10 per cent between July and September 2016.2016 may be on track to be the worst year yet for annuity income, but (and I hate to use the ‘G’ word again) the income is ‘guaranteed’ and remains a safe option for the many people who have no capacity for risk. However, in order to get a guaranteed income, people are receiving say 6.4 per cent less with an annuity or are perhaps using a third-way product, which might be more costly and/or complex.For me, the biggest risks in the current retirement planning process are longevity and investment risk and a buoyant and competitive annuity market is vital for many to address that risk.

Mike Morrison: When will we realise what we've done?

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