Norwich Union have just announced that life and pensions (including annuities) sales have dropped 12%. They saw their UK life and pensions sales tumble by 12% during the first quarter of this year, from figures just released. They claim that the dramatic changes in world stockmarkets and the global recession have hampered people’s ability to save and plan their finances properly, leading to a downturn in business. Their total new life business fell to around £2.5bn in the first three months of this year, down from £2.85bn in the same period last year.

However, Norwich Union says the rapid downturn in the world markets at the end of last year means the preceding quarter is actually more directly comparable. On that measure, their sales are broadly stable, with new life and pensions business reaching £2.4bn in Q4 last year.

Individual pensions have performed quite strongly, up 17% since December last year to £900m, and individual annuity product sales increased 24% to around £407m over the same period. Overall pension sales did fall 11% to £989m compared with the first three months of last year, while total annuity sales are actually down 8% to £475m.

Protection business saw the sharpest fall for Norwich Union, with them blaming the Competition Commission’s ruling on single premium PPI as having a heavy impact on business.

Norwich Union continues to try and renegotiate the reattribution of its large with-profits fund’s inherited estate.  It says that its discussions with the policyholder advocate are drawing to a close, and the final deal to be reached is likely to be considerably less than the original offer. The inherited estate has been valued at about £1.4bn at the end of March.

Norwich Union remain one of the top companies when it comes to seeking out annuity quotes for the best annuity rates for an individual’s set of circumstances.

There is an attraction to buying an annuity. For advisers and providers, the at-retirement market has some highly accessible opportunities. The number of people that enter retirement each year is growing and with more and more providers chasing their pension funds, they are being faced with an increasingly broad range of retirement options. Confusion is said to be rife and the demand for advice from those in this group is therefore likely to grow substantially over time.

There was a time when the only real choice for the vast majority of those with individual pension funds was to purchase a conventional annuity with their fund. Over the past ten years or so, the landscape has changed greatly and the choice has widened.

It is not uncommon these days to see comment proclaiming that people don’t want to buy annuities  and that use is declining. However, research from Just Retirement shows that the issue is not a case of people not wanting to buy an annuity but rather that the majority don’t really understand what an annuity is. In a sample of over 1,000 people, a significant 28% had not heard of an annuity, 5% were not really sure and of those that had, almost 50% were unable to identify an annuity contract correctly.

It is, however, a fact that more than 450,000 conventional annuities were sold last year, up 5% on 2007. Sales of enhanced annuity contracts and impaired life annuities rose about 31%. It is forecast that annuity sales will reach an enormous £20 billion by 2012. So there is clearly considerable interest in providers selling them.

The level at which a retiree would wish to take risks with their pension fund is a function of attitude and circumstance and will depend hugely upon the ability to guarantee a specified minimum income regardless of fund performance or other external events. The specified minimum income will vary but should be straightforward to estimate. It will be a combination of any state benefits, a defined benefit (final salary) pension or a personal pension, possible income from investments or savings, and any income from earnings.

Those few with larger pension funds may well choose to follow the Unsecured Pension (USP – previously known as income drawdown) route and leave funds invested to recover while they draw a reduced annual income. This assumes that they can afford to draw a lower income and, even now, the flexibility of USP is being affected by gilt yields, upon which the maximum drawdown is based, which has fallen to 3.25% and could fall further. An annuity is a guaranteed income for life in retirement, not reacting anything like  USP when it comes to market instability. Line them up alongside each other and in order to maintain the same income level as an annuity an USP fund needs to grow by 7.5% each year (or 8% each year for an enhanced life) just to stay on track. Additionally, those clients eligible for an enhanced annuity rate can typically increase their income, above a standard annuity, by up to 33% and up to 60% for those with more serious medical conditions.

Data from the Association of British Insurers (ABI) suggests that a very large number of funds are too small to be proof against short term market shocks. Projections indicate this will probably be the case for a long time to come and so the vast majority of people will be best served by simply shopping around using their open market option to secure the best annuity rates available. It is likely that there could well be an increasing number of larger retirement funds materialising over the next ten years or so and the availability of flexible retirement options for these will make a big difference, subject to careful planning.

Alongside this, though, there will be an even larger number of smaller funds with people requiring simple assistance needed to secure the best annuity quotes and the best guaranteed income for the rest of their lives. For the vast majority, an annuity purchase will be the very best way of achieving this.

If you are considering income drawdown instead of buying an annuity you might wish to delay doing so until May. Many advisers are urging retirees on the verge of taking income drawdown to wait until May or they will lock themselves into a record low level of income.

There have been many reports that the Bank of England’s quantitative easing programme and bank interest rate at an all-time low of 0.5% had pushed down gilt yields, causing a negative impact on those people taking income drawdown, and this is because the Government Actuary’s Department (GAD) rate for drawdown is calculated each month using what is known as gross redemption yields on UK gilts as a basis and this income has to be locked in for five years.

The rate for March was 4%, which equates to a maximum income of £7,200 a year for a man of 60 with a pension fund of £100,000, but April’s yield dropped to 3.25%, the lowest since income drawdown was introduced in 1995. This GAD rate only allows a maximum annual income of £6,600 on the same basis of a 60-year-old man with a £100,000 fund. However, the figures for May, are more promising, increasing the GAD rate to 3.75% which allows a maximum annual income of £7,080. It all makes income drawdown quite a complex retirement option.

This whole episode illustrates just how unfair the calculation for drawdown is. Anybody considering taking the maximum annual income from drawdown now will be greatly disadvantaged compared with someone starting their drawdown arrangement in March and someone who will start theirs in May.

GAD rates are very important because they set the maximum income limit for the next five years. The conclusion is that retirees should pay extremely close attention to the timing for the start of their income drawdown plan. Indeed, if retirees can wait for another month to lock in their income, then they definitely should do so, but taking maximum income is rarely a good idea, particularly in volatile markets, as it can eat away at the overall pension fund. too rapidly. Don’t forget, gilt yields and bank rates also have an effect on annuity rates.

We have a bit of a dilemma in the annuity market at the moment, with a big question looming: Will the Government’s £220Bn gilt spree bring volatility to annuity rates? According to one leading annuity provider, LV=, the Government’s issue of £220bn in extra gilts probably will lead to volatility in annuity rates for some time to come.

Their head of annuities, Matt Trott, says the price of gilts reduced in response to the Budget move, and he therefore suggests that gilt yields could rise, which could lead to an improvement in annuity rates, but this depends on the relationship between the Government and the Bank of England. Certainly we will have to keep a close eye on annuity quotes.

The two different bodies are doing different things, with the Bank of England using quantitative easing to buy up gilts, and there is therefore likely to be volatility in the annuity market for some time. It all really depends on how the two bodies talk to each other across the Square Mile (financial district in London) and how the new gilts that are issued match with the gilts that the Bank of England is buying. Future compilation of annuity tables could be quite complicated.

There are two different thoughts on this. One is deflationary, and the other inflationary. In respect of the former, if the Government has issued extra gilts as part of quantitative easing, the issuance of even more gilts is part of this process and will ultimately lead us to higher inflation. Longer-term gilts will rise over time, so annuity rates will rise, subject to longevity.

A big, big, question at the moment: will deflation have an impact on annuity incomes for those individuals who chose to buy index linked annuities? Might their income fall after the retail price index (RPI) fell below zero for the first time since 1960, nearly 50 years ago?

Certain annuity providers such as Prudential, Standard Life, Partnership and Just Retirement say that some people will be hit by the RPI deflation, which now stands at a lowly -0.4 per cent, although less than 10% of annuities are inflation-linked and only a small proportion do not have a floor option which means there are only a few that will be affected by deflation.

Leading annuity provider, LV=, has stated it will not be cutting annuity income on its RPI-linked annuities and Axa has also stated that deflation will not affect its customers. On the other hand, Standard Life has 6,000 retirees with an RPI-linked pension annuity without a floor and Prudential has 9,000 clients in the same position.

Standard Life’s head of pensions policy John Lawson stated that it would not be treating customers fairly to introduce a floor to these annuities for customers who have not actually paid for it. Interesting point of view.

So, if you are considering protecting your income by looking at annuity quotes to find the best inflation linked annuity rates, beware. Read the small print!