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Going into reverse?

05 April 2016

Annuity sales have overtaken drawdown for the first time since pension freedom reforms.

Challenges in the world economy and recent drops in equity markets could be behind a revival in the popularity of annuities.

Members of the Association of British Insurers (ABI) sold 21,000 annuities compared to 19,500 drawdown products in the last quarter of 2015. This follows a six-month period during which drawdown products consistently outsold annuities1.

Speaking last week, Huw Evans, Director General of the ABI, told the House of Commons Work and Pensions Select Committee that the resurgence in annuities may signal a change in consumer sentiment, but added that it was too early to say whether this was part of a long-term pattern.

Evans told MPs: “You would expect, at a time when equity markets are challenging and volatile, that people might be more wary about drawdown.”

Turning back

Since the ‘Freedom and choice’ reforms were introduced in April 2015, anyone retiring with a defined contribution pension has had the liberty to sidestep annuities, keeping their pension fund invested via income drawdown, or taking cash out of their pot.

But Evans suggested that the negative rhetoric towards annuities – language that had been used to justify the Chancellor’s reforms – had weakened, which might be why consumers have readjusted their viewpoint.

He told the select committee that there is a tranche of customers who are thinking a little more about the relative merits of an income for life. Evans also said that the initial dash for cash, witnessed in the wake of the new freedoms, had started to slacken. Around £660 million was withdrawn in cash in Q4 2015, compared to £1.2 billion and £1.3 billion in Q3 and Q2 respectively1.

“We knew there was a pent-up demand for people who wanted to liberate small pots,” said Mr Evans. But he believes that there is now an increased focus on income, and that many retirees want an income that is fixed for life.

However, he also pointed out that, in an era of artificially low interest rates, an annuity purchase remains “a challenging proposition” for some individuals.

Thinking ahead

Ian Price, Divisional Director at St. James’s Place, says the findings support his view that annuities will remain a feature of retirement in the UK, despite the fact that people can now use their pension how they like.

“I think we’re seeing some of the dust settle following a year of unprecedented change,” says Price. “What’s emerging is that people still value the security of an annuity.”

But while Price welcomes news from the ABI that “customers are taking a commonsense approach”, he is concerned that some people may start to access unsustainable levels of cash once their tax-free personal allowance is reset in the new tax year.

“Cashing in might be appropriate in some circumstances, but advice is the key to understanding the merits of each option,” says Price.

However, he maintains that most people who have built a significant pension fund during their working lives tend to use it responsibly in retirement.

“The findings from the ABI demonstrate that trend,” says Price.

1 www.abi.org.uk, 28 March 2016

 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

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