The latest entrant is pension fund provider Jessop Fund Managers, which announced on Tuesday that it has launched a new, no-fee income drawdown plan, in an effort, it said to take advantage of the growing demand for “low-cost alternatives to annuities”.
But, while product providers want to be in the running, the real question is how much of an actual impact will it have for product providers?
Robin Stoakley, head of UK Intermediary at Schroders, believes that while annuity replacement products are, and will continue to be the next big thing in asset management from a product development point of view, they are not going to be the game changer that many people think.
Speaking recently to Portfolio Adviser, he explained: “There will be without question a significant number of products developed for the annuity replacement market in the next few months, products that provide reasonably decent income, relatively low volatility and diversification. That is going to happen; we are developing one at the moment as well.”
But, he adds, the amount of money that will filter down to the asset managers and wealth managers, while not an insubstantial amount, will not be as significant as some expect.
He explained the industry roughly estimates that, of the around £12bn a year being spent on annuities currently, somewhere between £3bn and £9bn are unlikely to be made once the pension changes come into effect.
However, that number needs to be further broken down. The first thing to note is that the size of the average pension pot is quite small.
“For those people with pension pots of around £20,000, £40,000 to be honest, it doesn’t matter what product you buy, the income that you are likely to get is relatively miniscule. And, as a result, many will instead choose to buy something tangible with that money,” he said.
This view is borne out by a recent survey done by Natixis Global Asset Management which found that 57% of UK financial advisers polled expect an increase in the level of people squandering their pension pots after the reforms take effect.
“The survey of 300 UK financial advisers revealed that 23% expect a majority of their clients to withdraw their entire pension pots as a lump sum on retirement,” Natixis said.
According to Stoakley, from a new product point of view the focus must be on the pool of pension pots around the £150,000, £200,000 mark, because those people with very large pension pots would have already been exempt and would have sought advice and funds before the changes were announced.
“Quite a lot of that money [those £150,000 to £200,000 pots] is going to go into mutual funds, some of that money is going to end up in buy-to-let property and much of that money will remain with the pension providers,” he says.
According to Stoakley, companies like Aviva and L&G, those big firms that previously would have offered annuities will come up with their own replacement products that are likely to be attractive to their existing clients, many of whom will have been with them for 20 or 30 years.
A second thing to note is that people are both living and working for longer and, as a result, Stoakley says, the sector is seeing an increase in people deferring annuity purchases – a trend he believes will continue.
This deferral of annuity purchases is also likely to be bolstered by the fact that as interest rates eventually start to rise and continue to do so over the course of the next few years, annuity rates will become increasingly attractive again.
Thus, it is entirely possible that in a few years’ time, while no longer forced to choose an annuity, the newly competitive market and higher interest rates will make them one of a range of valid options.
