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Pensioners run to annuities as dash for cash eases

Pensioners run to annuities as dash for cash eases

by Michelle McGagh Mar 31, 2016 at 13:52

The dash for cash after the chancellor unveiled his pension 'freedom' reforms a year ago is slowing. More retirees are seeing the benefit of buying an annuity, despite George Osborne's prediction at the time that there would no need to purchase one in future.

The latest figures from the Association of British Insurers (ABI) show sales of annuities – which are the life insurance contracts that traditionally provided pensioners with their income – recovered at the end of 2015 after slumping following the launch of the reforms last April.

In the second quarter of last year retirees bought 18,200 annuities, just behind the 18,800 who opted to take out 'drawdown' policies instead where a pensioner's money remains invested and an income is 'drawn down'.

By the end of the year, however, the balance had shifted. In the final quarter of 2015, 21,200 annuities were sold compared to 19,700 drawdown policies.

Pent-up demand

A similar move can be seen in those choosing to take their pensions as cash rather than use the money to buy annuities. In the second quarter of 2015, £1.3 billion was withdrawn from pension pots as retirees took advantage of their new freedom, while £990 million was invested in annuities. Again, by the fourth quarter, that had reversed with annuity sales increasing to £1.1 billion with £660 million taken as cash.

Andrew Tully at Retirement Advantage, a retirement adviser, said the change between the second and fourth quarter figures reflected the pent-up demand for pension cash that built up after the chancellor's announcement of the pension forms in the 2014 Budget.

He said it had made sense for ‘those with £15,000 in their pension or less, who are only going to get £10 a month [if they annuitise] to take the cash’.

‘The dash for cash has slowed down because there was pent-up demand which skewed the figures in the first months of pension freedom, there were lots of people waiting [to take their money],’ said Tully.

‘Annuities have edged up…and in the fourth quarter more people bought them than bought drawdown.’

Money-back guarantee

Tully said this was partly down to innovation in the annuity market which tackled the main concern retirees had that, once they die, the rest of their pension savings are kept by the insurer.

As annuities are life insurance contracts that insure against you living too long, a standard annuity pays out until you (or you and your spouse if it’s a joint life policy) die. If you retired and bought an annuity and were unlucky enough to die the next day, the insurer keeps the pension pot.

Now, guaranteed annuities are helping to mitigate that risk. Although all annuities are guaranteed to pay an income until you die, ‘guaranteed annuities’ pay out for a set number of years – typically up to 30 years. This means money will continue to be paid after you die.

‘If you die after five years, the money is paid out to your family [for the remainder of the guarantee],’ said Tully.

‘One of the big problems with annuities was the idea that the insurance company kept your money. If you buy a 20-year guarantee, then you will get all your [original pension fund back as income] and if you have a 30-year guarantee, you will get 150% of what you put in back.’

Since the pension rules changed stock markets have been volatile which has discouraged many people from going into drawdown where their money is still at risk: they ‘sense it’s better to have a guaranteed income’, said Tully.

Not enough shopping

Although annuity sales have bounced back, there is still concern that not enough retirees are shopping around for the best annuity deal. The ‘open market option’ gives people the opportunity to buy an annuity from any provider and not just the company with which they saved for their pension.

John Perks, managing director of retirement solutions at insurer LV=, said while freedoms ‘were working as intended’ to provide people with flexibility ‘there are still large numbers not shopping around and this is extremely concerning’.

‘People who shop around…are more likely to get a better deal,’ he said.

Perks called for more reform to make financial advice easier to obtain as it ‘should help more consumers understand their options to blend multiple products together to meet their changing needs throughout retirement’.

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Comments  (3)

  • Maverick: 

    May I politely suggest that figures from the Association of British Insurers will almost inevitably stress how well annuities have been selling.

    What the figures surely show is that around half of all retirees are opting for drawdown, which I suspect (not having any figures to hand) is about 40% more than before the pension freedoms came in. What is also significant is that most of those opting for drawdown seem to have made their decisions without recourse to Pension wise or even an IFA.

    Of course an IFA will recommend an annuity - it's the safest way out. But the retiree is paying through the nose to buy something he could replicate without a great deal of bother.

    Agonising over buying an annuity is just the same as agonising over whether to send your children to private schools. You don't get to find out if you were right or wrong until it's far too late to do anything about it. At least with drawdown you keep your options open . . . .

    19:19 on 31 March 2016

  • Pilgrim: 

    "Again, by the fourth quarter, that had reversed with annuity sales increasing to £1.1 billion with £660 million taken as cash."

    This comparison is not comparing like with like. The annuity purchasers are buying forward income streams, i.e. twenty or 30 years income as a single purchase. The drawdown 'sales' include many pensioners drawing current income only, not forward income.

    There are also further complicating factors.

    ++Annuities may be a more attractive route for smaller funds because the administration costs for small draw-down funds can render them relatively inefficient. This depends of course also on the selection of the draw-down fund operators. Some charge on a percentage of fund basis, others on a fixed fee basis.

    ++Many draw-down funds are not 'crystallised' (brought into payment) in a single step. The funds are split into tranches (slices) and each tranche can thereafter be brought into payment at a different time.

    ++Some pension funds will brought into payment in a hybrid form, some of the fund being used to purchase an annuity, the rest of the fund being retained as a draw-down reserve.

    ++The cash withdrawn from a draw-down fund at any particular year is not representative of the underlying fund value which will generally be a large multiple of the cash taken.

    Note, that this does not refer to the 25% tax free margin, as this is available in whatever form benefit is taken.

    21:55 on 31 March 2016

  • Ray Monk: 

    I would suggest that if you speak to an IFA and he only advises you to take an annuity you have chosen the wrong IFA to discuss your future with.

    When I spoke to my IFA we discussed ALL options, including annuities. This is what they should do and if they do not I would suggest you go elsewhere for advice. A key point here is to tell the IFA what YOU want out of your pension and do not just leave it up to them. There is plenty of information freely available so read up and do your homework before you see an IFA.

    13:52 on 02 April 2016

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