Annuities gain ground on drawdown as savers seek income for life

A new factsheet from the ABI shows the initial flurry of activity to access cash in the wake of the changes petered out during 2015 and the market shows signs of normalising.

In the nine months from April 2015, £3bn was paid out in cash lump sums to 213,000 investors, an average payment of £14,800, according to the ABI.

In that time, £4.2bn was invested in 63,600 income drawdown policies, with an average fund size of £66,000.

News of the death of annuities was also found to be greatly exaggerated, with £3.3bn invested in 61,700 annuities – an average of £53,000.

'Rational decision-making'

Yvonne Braun, the ABI’s director of policy for long-term savings and protection, said that after some initial pent-up demand, the number of people taking all their pension as cash has settled, with savers taking a “sensible approach” to considering how they will pay for their whole retirement.

“Annuity sales are beginning to see a revival, with more annuities than drawdown products sold in the last quarter,” Braun said. “This shows people still really value a lifelong guaranteed income.”    

Andy Cheseldine, partner at LCP, agrees that the data suggest “people are being quite rational in their decision-making”, which he said was “very positive”, as was the overall amount of money withdrawn.

“At around £6bn, though quite a lot of money has come out, that is similar to what was going into annuities before,” he added.

The data support the findings of the Pensions and Lifetime Savings Association’s own report published at the end of January that investigated the first six months of the new regime.

The PLSA study identified three clear groups – the actioners, investigators and inactives.

The actioners – engaged and experienced investors – would take advantage of the new freedoms immediately, but the study warned against extrapolating from their actions the behavioural pattern of the whole market.

Annuity sales growth

The trends are also echoed in data published by the Financial Conduct Authority last year. It showed 204,581 plans were accessed during the first three months of the freedoms, but that fell by 13 per cent to 178,990 in the following quarter and may be explained by the pent-up demand from people accessing their funds.

Annuity sales – undermined by the original announcement of the reforms – showed considerable growth after that first three-month period. The FCA figure of 12,418 for the first three months – roughly 20 per cent of the ABI’s figure for nine months – almost doubled to 23,385 in the second quarter after the reforms.

Nathan Long, head of corporate research at Hargreaves Lansdown, said that in terms of policy numbers, drawdown and annuity sales are roughly equal in the ABI figures.

“Annuities are holding up well, and this is encouraging because they have a role to play in retirement,” he said.

Platforms outside ABI universe

However, among his own clients, drawdown continues to outstrip annuity sales, despite actively marketing the virtues of a guaranteed income, according to Long.

This highlights an anomaly in the ABI data when compared with the FCA’s, said Long.

“Many of our clients are used to making investment decisions and will continue to do so in drawdown. The ABI data don’t show money has flowed onto platforms used by sophisticated investors outside the ABI universe.”

In addition to Long’s clients, most financial advisers use platforms these days, some of which are not ABI-affiliated. This may explain any variances in the data on drawdown between the ABI and FCA.

In the main, consumers appear to be making choices that many would see as rational, but few of these individuals are solely reliant upon a defined contribution pension.

But to secure the future for those who will rely on DC, more help with decision-making is needed, said Gregg McClymont, head of retirement savings at Aberdeen Asset Management.

“The big question remains: as gold-plated final salary pensions become rarer and retirees rely solely on these flexible pension pots, will savers have access to the guidance and advice needed to make life-changing decisions?”