National Financial Planning group Continuum has predicted that annuities may see a return to favour as advisers try to cope with the impact of soaring inflation on their clients.

The company believes that the guaranteed long-term income of an annuity may be more sought after, particularly index-linked annuities which offer a chance of long term income growth.

Annuities have declined significantly in popularity in recent years as clients have moved towards income drawdown products following the Pension Freedoms.

Continuum believes that the ability of some annuities to provide a rising income could make them more valuable against a backdrop of high inflation and less certain income from drawdown and other retirement income strategies.

Figures from the FCA’s 2020/21 FCA retirement income data published in December revealed that over 40% of pension savers were withdrawing from their pension pot at an unsustainable annual rate of 8% or more.

By withdrawing at such a high rate, many pension drawdown users risk of running out of money before they die, warns Continuum.

The FCA figures also showed that the number of annuities purchased fell by 13% during the year.

Despite the long-term decline in annuity purchase, Continuum believes that rising inflation has the potential to lead to a “strong resurgence” in annuities' popularity.

UK CPI rose by 5.4% in the 12 months to December, hitting a 30-year high, according to figures release by the Office for National Statistics this week.

Continuum believes that annuities, particularly index-linked annuities which provide potential growth in income, could provide clients with some income certainty during an uncertain period.

Martin Brown, managing partner at Continuum, said the re-emergence of inflation would encourage advisers and clients to re-examine the value of annuities.

He said: “We expect to see an increase in the popularity of annuities among advisers. Index-linked annuities could prove to be a particularly popular recommendation as advisers look to offer their clients some protection against inflation which looks to be long-lasting.”

“Inflation means complications for most types of Financial Planning, but particularly for anyone looking at a pension. If inflation stays at its current level of just over 5%, a pension income that seems lavish now at retirement can be painfully small 20 years later.”