The ideal annuity product should provide elements of insurance for health needs during retirement, while deferred annuities could be combined with income drawdown products that protect against longevity risks, the Pensions Policy Institute has said in its latest briefing note.
Published yesterday, the PPI's Freedom and choice in pensions paper compared international retirement systems and the role of annuitisation.
PPI said: 'The analysis suggests that innovation in the market, for example annuities that can also provide elements of insurance for health, disability or long-term care needs during retirement, and deferred annuities that could be combined with income drawdown products to provide insurance against very long life, could provide features that consumers value as the industry responds to the new flexibilities in the Budget.'
The think-tank suggested that, while demand for annuities is expected to fall in the short-term as a result of the new flexibilities, improved annuity products could prove to be an attractive retirement income solution for some groups in the future.
PPI deputy director Mel Duffield cited Treasury figures, which suggest that take-up of annuities among retirees with DC pension pots could fall from around 75% now to 50% post April-2015.
The PPI's review of international retirement systems highlighted a number of factors that affect the demand for annuities across different countries which it believes could be relevant to how the market develops in the UK.
These were: basic cultural attitudes and the appetite for a secure and guaranteed source of income; the structure, variety and perceived value of the other retirement income products; the timing and framing of the decisions about how to allocate pension savings; and the perceived attractiveness of the annuity rates on offer.
'In Switzerland, where unlimited access to private pension saving is allowed and annuity rates are seen as good value, around 80% of DC savings are still put into lifetime annuities at retirement,' said Duffield.
'And in Denmark, where decisions in some voluntary pension savings vehicles on how to allocate pension savings are taken well ahead of retirement, around 85% of voluntary pension savings are being allocated to either lifetime or fixed-term annuities.'
In other counties, such as Australia, Canada and the US, lifetime annuities play only a small or negligible role in the market. However, there are growing concerns in these countries that retirees are not sufficiently well informed about their retirement needs and are running down their pensions too quickly, Duffield stated.
The briefing note argues that the industry and employers have a pivotal role to play in designing simple, understandable, and good value for money products that savers can use to access their DC savings at and during retirement.
