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Priced for Armageddon: Should you snap up shares in annuity providers?

Nick Paler
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Nick Paler

This week’s Budget effectively removed the requirement to ever purchase an annuity, causing shares in listed providers to drop over 50%, but is there value in the sector after such a monumental sell-off?

The Budget overhauled the savings and investment landscape in a dramatic and unexpected way, providing much more flexibility for people in retirement.

In particular it allowed savers to take all their cash out in one lump sum, and said no one in retirement need buy an annuity.

Investors saw the change as the effective end of annuity sales, with Just Retirement – the annuity provider – tumbling 42%, and peer Partnership Assurance – a provider of non-standard annuities for individuals with medical conditions – down 55%.

Larger insurers and retirement specialists also sold off as the sweeping changes were unveiled, with Resolution closing down 10%.

Late Wednesday and early Thursday providers including Resolution and Legal & General – which itself closed down 9% – said the changes announced in the Budget were revenue neutral.

Analysts and fund managers agree, noting their is exceptional value in some stocks now.

Schroders’ Jessica Ground, fund manager and analyst covering UK equities, said: “The immediate reaction may seem as though it is Armageddon for the annuities market but it is likely to take some time to work out the details.”

She conceded the announcement had come as a shock, hence the scale of the sell-off, but said the annuities market would not be allowed to simply vanish.

“96% of people who had a pension pot bought an annuity last year. However, it is not necessarily the case that this is the end of annuities forever,” she said.

“People will no longer be compelled to buy one but many individuals may still do so. The government clearly will not want a situation where people do not buy annuities and then run out of income during their retirement.”

Barrie Cornes, analyst at Panmure Gordon, said while the abolition of compulsory annuity purchase is a massive change to the industry it does not mean the end of annuity product sales.

“Share prices have been hit hard to the point where we think the market is assuming no new annuities will be written going forward,” he said. “We think the product will still be acquired given the need for security of income in old age.

“Being able to draw down an entire pension pot without a sizeable alternative income seems bizarre and lacking in forward thinking. Based on these asset values we believe that both Partnership and Just Retirement current share prices represent and exceptional buying opportunity and that the share price reaction has been an overeaction,’ they said.

“The current valuations of both are close to assuming that no new business will be written, which we view as wrong. We note also that they both have highly valuable intellectual property that would be highly sought after and prized by their competitors.”