Annuity market collapses as savers run for the hills

Less than a week after George Osborne reinvented the UK’s pensions industry, more than 150,000 clients resigned to being locked into an annuity have pulled out of their deals.

UK and international pension firms are watching in dismay as their cash cows disappear over the horizon, seeking fresh fields and pastures new which allow them the freedom to do what they want with their own savings. FTSE 100 financial firms including Prudential, Aviva and Standard Life are shivering at the sound of ripped-up contracts.

CEOs from the affected companies have clubbed together to better lobby anyone in government and the regulatory bodies inclined to listen to their sorry plight, with the Financial Conduct Authority (FCA) already bearing the brunt of their complaints. The Prudential Regulation Authority is another significant target.

A major gripe is that the insurance giants were given no warning that the plug was about to be pulled on their lucrative annuity schemes, even although the FCA had previously announced its determination to make annuities fairer to consumers. The move by the chancellor has disproved the old adage of ‘too big to fail’, although it’s unlikely the firms will disappear any time soon.

Annuities have been unpopular with retirees for some years, mainly because of their poor returns compared with the amounts involved, high set-up charges and increasing reports of mis-selling and outright fraud. On a pension pot of £38,000, almost 10 per cent goes on arrangement fees, and returns of around three per cent a year do little to improve the difficulties of managing on the measly UK state pension or on a frozen pension in non-EU and Commonwealth countries.

One of several more elephants in the room was the fact that annuity payments cease on death, with the remaining capital reverting automatically to the product provider company. Feelings about this became even more acute after the government’s recent announcement that widows’ pensions are to be discontinued.

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