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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.
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 In the second quarter of 2015, £1.3 billion was withdrawn from pension pots as retirees took advantage of their new freedom, while £990 million was invested in annuities.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.’
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.
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’.