For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
Is the annuity set to rebound?
The annuity was once the bedrock of British retirement planning and a natural (and obligatory) alternative for those without final salary pension schemes. After all, why wouldn't you want the insurance of a guaranteed lifelong income? Of course, in the last decade, this long-standing premise has been smashed to smithereens as a result of a rapid decline in annuity rates.
For example, in 2008, a 65-year-old could buy a £100,000 single-life annuity and receive an annual income of about £7,800. By April 2015, however, such a policy paid an income in the region of just £5,400.
In fact, in the last few years, annuity rates have continued to sink further. At present, a £100,000 joint-life annuity for a couple aged 65 and 60 (reducing to two-thirds on the death of the first annuitant) would offer an annual income of roughly £4,500. Yet even four years ago, it would have yielded a slightly more-palatable income of around £5,300. This represents a staggering drop-off of 15 percent.
Why have annuities tumbled?
The former, whose path of destruction extended to many realms of economics and finance, resulted in a severe credit crunch. In turn, this led to the Bank of England (BOE) embarking on a vast quantitative easing programme. The BOE then used this increased money supply to purchase investments such as gilts and bonds in bulk, which depressed yields.
However, because insurance companies invest funds earmarked for annuities cautiously, they too choose such 'safe' investments, and, as a result, these falling yields have been passed on to annuity buyers.
The other shock to the system was then-Chancellor George Osborne's announcement at the 2014 Budget speech that, as of the following spring, "No one will have to buy an annuity". Prior to this, annuitising had effectively been compulsory for all individuals when they reached retirement age. However, the 2015 pension freedoms have removed this obligation, and anyone with a pension can opt for pension drawdown instead (whereby the individual can choose how much income to take, and where to invest the remaining funds).
With annuity rates in the gutter, it comes as little surprise that many people have subsequently chosen to go down the drawdown route. In the last decade, annuity sales have nosedived from around 400,000 per year to just under 80,000 – with the majority of this decline accounted for in the last few years. A slew of providers has since exited the annuity market too, including some big-name insurers. As a result, reduced competition has exerted further downward pressure on annuity rates.
So is the annuity headed for the abyss?
No doubt about it, annuities have taken a battering in recent times, and there haven't yet been any definitive signs that the slide has halted. However, there are a few reasons to harbour the legitimate belief that the tide is set to turn and that more people may revert to this former ever-present as an investment of choice.
Firstly, the recent Bank of England rate increase - coupled with the likely scaling back of quantitative easing - will place upward pressure on the yields of government bonds and gilts, which should feed through to annuity rates. And the fact that further rate hikes are forecast in 2018, largely due to robust inflation, should compound this effect.
The second key determinant will be that of stock market performance. While many pensioners on drawdown schemes will have benefited from a booming stock market over the past 18 months, many experts are predicting a correction in the near future. Should this transpire, attitudes may change, and those in, or approaching, retirement may well look to shift their portfolio to incorporate safer bets like a guaranteed lifelong income.
And finally, let's not forget that the annuity market in 2017 was still estimated to be worth roughly £4bn (around £10bn for bulk annuities). So, this particular investment class certainly isn't going to disappear off the map anytime soon, and still plays a significant role in British retirement planning.
Keep it in mind
The weaknesses of annuities, such as poor returns and a lack of flexibility, are there for all to see. However, there aren’t currently many other ways to earn a guaranteed income for life, and for many pensioners who are more risk-averse, this can deliver the peace of mind they need.
That's not to say that annuitising your entire pension pot is necessarily the best option. For some, it may be preferable to annuitise a portion of your portfolio and invest the remainder in a variety of other asset classes (such as peer-to-peer lending). Either way, it is this ability to pick and choose which is, in itself, surely a force for good, and, if used sensibly, an excellent enabler to ensure that we can all maximise wealth and financial security during our golden years.
The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
As the tax year end approaches, the financial services industry readies itself for a flurry of activity. That's in large part because, with just a couple of months to go, the so-called 'ISA season' is upon us.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.