The launch of the pension freedoms last April led many to predict the end of annuities, and for a while that looked to be the case – demand hit rock bottom and annuity rates followed suit, driven by consumers taking advantage of the option to consider other means of income generation.
However, a year into the new regime and it looks as though a reversal of fortune could be on the cards, with figures from the Association of British Insurers (ABI) revealing that annuity sales in the final three months of 2015 outweighed the number of income drawdown policies sold over the same period. Annuities are coming back!
The figures show that 21,200 annuities worth a total of £1.1bn were sold during the three-month period, compared with 19,700 drawdown policies, which totalled £1.4bn in value. Significantly, this marks the first time that annuity sales have outstripped those of income drawdown since the freedoms were introduced, so it looks as though the market may be settling down after the initial rush.
This can be further seen in terms of cash withdrawals. Initially, there was something of a rush for full encashment as retirees were keen to access money they were unable to previously, but it appears that consumers are now taking a more "common sense" approach, said the ABI. This finding was mirrored by research from AJ Bell, which found that the vast majority of their customers were shying away from full encashment, with more sustainable options being preferred.
It's perhaps little wonder that annuities are still popular among many retirees. They're still the only way to secure a guaranteed income for life, and for many, that kind of security is far more important than the flexibility of being able to spend the pot as they wish. There won't be any surprises later down the line and there's no chance of spending the pot too soon – which is probably why annuity sales are quickly picking up.
Indeed, looking at the post-freedom period in its entirety, the ABI figures show that £4.2bn has been invested in 63,600 income drawdown products since April 2015, while 61,700 annuities were purchased over the same period (amounting to £3.3bn) – a figure that isn't far off the income drawdown total, and if the next quarter follows the pattern of the last, it may not be long before annuity sales revert to being the preferred choice overall.
"One year on from the pension reforms, the freedoms are settling in and working as intended," said Dr Yvonne Braun of the ABI. "Following some initial pent-up demand, the number of people accessing their pension pot as cash in one go has settled down; people are taking a sensible approach and considering how they will pay for their whole retirement. Annuity sales are also beginning to see a revival, [which] shows that people still really value a lifelong guaranteed income."
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