21st November 2014
Sales of annuities have continued to fall since pension freedoms were announced in the Budget with a decrease of 56% year on year.
Figures from the Association of British Insurers (ABI) show annuity sales are being replaced by drawdown sales – which are at their highest level – since chancellor George Osborne announced in the Budget that those aged 55 and over could use drawdown to access their entire pension pot as cash.
The number of drawdown contracts sold by ABI members has more than doubled compared to 2013 – 5,480 in the third quarter of 2013 versus 12,212 in Q3 2014. This directly correlates to a decline in annuity sales, which fell 14% in the last quarter and 56% over the year.
In the third quarter of 2013 90,414 annuities were purchased compared to just 40,085 in the third quarter of this year. The value of annuities has also fallen, showing that those with smaller pension pots are choosing to take the money as cash.
Rob Yuille, policy adviser at the ABI, said: ‘Pension flexibility continues to have an impact on customer behaviour in the retirement market, and it is clear that there are many people waiting to make a decision about what to do with their pension.
‘We are seeking to explore beyond the statistics with members to identify and explain the trends in customer behaviour in this transitional year.’
Andrew Tully, pensions technical director at insurer MGM Advantage, said: ‘Despitet heir being a clear demand for flexibility we are still seeing a clear demand for annuities, with good sales across Q2 and Q3. When customers describe what they want from a retirement income product; security and guarantees, they are describing an annuity type product.
Tully said there were concerns that internal annuity sales – where a retiree buys an annuity from their pension provider without shopping around, known as the ‘open market option’ – have not been as hard hit as external annuity sales.
‘What is really concerning about these numbers is that the open market option message appears to be lost in translation with the noise around the freedom and choice agenda. Internal sales are holding up, while the external, shopping around, market is down,’ he said.
‘This means people are not receiving the better value provided by enhanced annuities (which pay out a large income to those with health problems).’
He added: ‘As we move closer to the new pension freedoms, we need to put consumers at the centre of what we do. If people decide not to take up the offer of free guidance or look for advice, we need to find a way of ensuring a second line of defence protects consumers and ensures they don’t end up with products which do not fit their needs of provide poor value. Or I fear we will repeat the mistakes of the past.’