Offered by life insurance companies, annuities are products that allow those with retirement funds built up through individual pension plans and defined contribution pensions to convert those funds into income in their retirement. A standard (or ‘lifetime’) annuity converts the pension fund assets into a guaranteed income for life. As retirees do not know how long they will live in retirement, the ‘guarantee-for-life’ aspect of an annuity is important. The insurance company is able to make such guarantees by ‘pooling’ annuitants together into a scheme, so that those retirees that live longer than average are effectively subsidised by those that do not.

On the whole consumers know very little about the complex area of pensions. However, Mintel’s research suggests that they know even less about annuities. This is evidenced by the fact that over a third of the adult population have never even heard of an annuity. In addition, many of those that have heard of these products, do not fully understand their purpose or how they work. Communicating the product offer is a challenging prospect for those marketing annuities.

Another key challenge for the annuity market at present is that annuity rates have fallen to such a degree that many consumers do not feel that they get value for money from their annuity. Annuity rates have fallen because life expectancy (and consequently, the length of time spent in retirement) has increased to such an extent that the consumer’s income generated from their annuity has to be spread over a longer period of time. This has been compounded by the fact that interest rates have remained low over recent years, giving annuities lower ‘returns’ than other types of assets.

Despite such issues, annuities remain the best option for drawing an income in retirement for the majority of the population; and although rule-changes, introduced on A-day (April 6th 2006) allow a more flexible approach to annuity purchase, annuities will remain the core product for accessing pension savings in retirement going forward.