Gaps in the data on consumer behaviour following the freedom and choice reforms introduced earlier this year are creating a muddled picture of people’s choices, experts have said.
Numbers released since the introduction of freedom and choice have shown vast swathes of money leaving pension pots as cash lump sums or via drawdown payments.
Source: ABI
However, from the data acquired it has been less clear whether this behaviour is purely the result of pent-up demand from those who were waiting for the reforms to come into effect, or if it is a lasting pattern.
We’ve always known a lot of people want some kind of safe income in retirement
Tom McPhail, Hargreaves Lansdown
Annuity sales recovering
The latest Association of British Insurers’ data showed a reversal of fortune for annuities.
Sales of annuities have increased quarter-on-quarter for the first time in three years, with £1.17bn sold in Q3 2015, compared to £990m sold in Q2.
Steven Lowe, director at retirement provider Just Retirement, said: “That is quite a material shift. We’re starting to see the data emerge that people are starting to buy an income for later life, which is what a pension is for… We’ve started to see more normalised behaviour where people are investing their pension cash to buy an income for later years.”
Social Market Foundation study
Think-tank the Social Market Foundation this week released a study entitled 'Golden Years?' looking at the effects of freedom and choice on UK pensioners based on behaviours seen in the US and Australia. The main findings were:
UK retirees are at risk of pension pot exhaustion
Retirees are at risk of low replacement rates
Retirees are at risk of low incomes
Preservation of pension wealth is possible through under-consumption, but has big drawbacks
Retirees face variation in investment returns and uncertain incomes
The state faces significant risks of high costs
The foundation made two recommendations on the basis of its findings:
Introduce a 'retirement risk dashboard' to identify emerging risks at an aggregate level
Have 'personal pension alerts' to identify risks to savers at a personal level and to allow policymakers to intervene where appropriate
However, he added while behaviour was settling, the “broken data series” caused by the pent-up demand for freedom and choice had skewed the numbers and consumer behaviour had not yet normalised.
The ABI data show £4.7bn has been withdrawn under the freedoms, with £2.5bn paid out in cash lump sum payments, averaging under £15,000 in size. The other £2.2bn has been paid out via income drawdown payments, averaging £3,600 in size.
Lowe also noted: “One of the most obvious things we’ve seen is people accessing lump-sum payments are younger.
“The ABI said 60 per cent of people taking lump sums were under the age of 60, 80 per cent under the age of 65.”
Tom McPhail, head of pensions research at investment platform provider Hargreaves Lansdown, said: “We’ve always known a lot of people want some kind of safe income in retirement.”
Alongside the money paid out as lump sums, £2.85bn has been invested in income drawdown products, with an average fund of almost £65,000; and £2.17bn has been invested in annuities, an average amount of nearly £53,300.
McPhail said: “If you [put] together the new money going into drawdown for the first time, and to purchase annuities, and going out as cash lump sum payments, you’re looking at about £7bn there. But it doesn’t include all providers, which suggests while we knew there would be a wave of demand, we’re seeing no sign of it abating.”
Others also questioned the details of some of the data, especially when it came to lump sums.
Adrian Walker, retirement planning manager at Old Mutual Wealth, said: “When they talk about cash lump sum I’m not sure whether that’s tax-free cash or whether that’s tax-free and taxable lump sums. I suspect it’s a mix of the two.”
However, he added: “It feels indicative of the fact people aren’t taking all their savings, they have the pension as part of their wider wealth.”
