From the blog: The lead-up to the launch of the pension reforms in April last year created pent-up demand in the market, resulting in many opting to take advantage of the new freedoms and draw down a lump sum.
It is no surprise then that during this time there was a drop in annuity purchases.
However, recent reports state that pension savers are now opting for annuities as their primary retirement investment, rather than drawdown. In fact, the ABI’s pension freedomstatisticsshow the proportion of people purchasing annuities has been steadily increasing.
It is no surprise then that during this time there was a drop in annuity purchases.
However, recent reports state that pension savers are now opting for annuities as their primary retirement investment, rather than drawdown.
In fact, the ABI’s pension freedom statistics show the proportion of people purchasing annuities has been steadily increasing.
This could be because people are opting for a perceived sense of security, as provided by annuities. It could also be partly in response to recent economic uncertainty and stock market falls. Either way, many people appear to be less sure of what the right choice is for them.
So, do annuities or drawdown offer better value and return?
Although annuities do offer a guaranteed income for the remainder of your life, they are not without their drawbacks.
The key problem with annuities is their total value is determined by conditions at the time of purchase, and currently they aren’t competitively priced. They also offer limited flexibility in payments.
Source: ABI
Annuities offer security and good value for those who live a long time with little interest in managing their funds, and conversely are a poor return for those whose retirement ends earlier than expected.
Drawdown arguably offers better value than annuities currently. A major incentive for choosing drawdown is that savers can invest some of their drawdown funds into investment options including property, corporate bonds and equities, which can provide a better return than annuities.
However, returns can be volatile, with success not guaranteed. Managing drawdown also requires an understanding of investment and risk.
Drawdown does however deliver more flexibility in payment patterns, doesn’t rule out purchasing an annuity later, and funds can be left as inheritance.
The pension reforms have modernised the market. Now there is a need to ensure people know enough to choose the best option for themselves.
Of course, each individual’s circumstances and priorities dictate what is best for them. What is clear is that right now, annuities should not be considered the default for people who have worked and saved hard.
Fiona Matthews is managing director of Willis Towers Watson’s DC mastertrust LifeSight
