Integrating SIPPs and annuities for success

Despite the pension freedoms, annuities remain an important decumulation option for SIPP-holders. We've republished this article with the kind permission of SIPPs Professional.

In the immortal words of the legendary French singer Maurice Chevalier, “Ah yes, I remember it well.” In this case, the rather incorrect prediction of the death of annuities.

George Osborne, then as Chancellor, delivered his Spring Budget speech nearly ten years ago, pulling a massive pension rabbit out of his hat in announcing what would become known as the ‘pension freedoms’, whilst confidently announcing, “no one will need to buy an annuity again”.

That afternoon, the share price of some annuity providers practically halved, and the sale of annuities fell off a metaphorical cliff-edge, as the ‘pension freedoms’ took hold from April 2015.

Ten years later, we are awaiting an earlier-than-usual Spring Budget from the current Chancellor, Jeremy Hunt and, in what might prove to be the final Budget before a general election, commentators are already speculating about what ‘voter-friendly’ rabbits will emerge from his choice of headgear.

Despite many similarities between both events, however, one key difference has emerged: that 2023 set a new post-pension freedoms record for annuity sales.

Increased annuity sales

Recently released statistics from the Association of British Insurers (ABI) show that the total value of annuities sold in 2023 amounted to £5.2 billion, which was an increase of 46% compared with 2022. This included sales of £1.5 billion in the fourth quarter of 2023, which followed a strong third quarter when sales totalled £1.4 billion.

The number of annuity contracts sold in 2023 also increased to 72,200, which was 34% higher than in 2022, and the largest number recorded since 75,000 were sold in 2016.

I’ve always had a soft spot for annuities, as they are arguably the nearest one can get to a financial institution writing you a blank cheque.

In return for the purchase price, the annuity provider must promise to pay the annuitant a known amount of money every year for the rest of their life, whether they live to 75 or 105.

Decumulation options for SIPP-holders

Where SIPP funds are concerned, the experience of the pensions freedoms era is that income drawdown has become the ‘default’ decumulation option for SIPP-holders, as opposed to using the fund to buy an annuity. Worryingly, an increasing number of SIPP-holders have gone into drawdown without first seeking regulated financial advice.

In my days as an Adviser, which pre-dated the pension freedoms, I saw it as essential that anyone choosing income drawdown as their choice of decumulation option, went into it with ‘their eyes wide-open’; fully understanding the continuing investment risk inherent within a drawdown policy, and acknowledging this option was appropriate for both their attitude to risk, and capacity for loss.

The worse-case scenario was that they could run out of money part-way through a long retirement; an outcome that would not happen with an annuity that was guaranteed for life.

Whilst I fully accept that there are lots of compelling reasons against using all of a SIPP fund to buy an annuity at the outset of decumulation, I strongly believe that a time arises in an individual’s retirement journey when using some, if not all, of their SIPP drawdown fund to buy an annuity, represents a rational financial decision.

Clearly, the economic backdrop of the past couple of years have seen annuity rates increase significantly, which have made the income available from them more attractive. However, notable differences in annuity rates between providers persist, and the adage of using your ‘open market option’ to shop around for the best annuity rate, remains as relevant today as was the case twenty years ago.

SIPPs and drawdown remain natural bedfellows in retirement, although the rise in ‘DIY-drawdown’ since 2015 precipitated the Financial Conduct Authority’s introduction of non-advised ‘investment pathways’ in 2020 – offering a choice of pre-determined investment strategies, which appear anomalous where the self-invested objective of a SIPP is concerned.

Despite what George Osborne said ten years ago, I personally am pleased to see a resurgence in the annuity marketplace, and hopes that annuities persist as an important part of the range of drawdown options for SIPP-holders.

If you would like any further information, please email sipp@barnett-waddingham.co.uk.