The changes announced in the 2014 Budget have had far-reaching implications for the pensions landscape. It's widely expected that the annuities market will suffer a significant downturn as retirees look to take advantage of the new freedoms, and both demand and rates have already been affected.
Demand for annuities has fallen dramatically since the Budget announcement in March, with the latest IRESS At Retirement Report showing that it's down 47.1% on an annual basis. However, it's increased slightly over recent months, with advised sales climbing 10.5% in September compared with August. It's also 14% higher than the market's trough in June, so although demand is clearly subdued compared with previous norms, the figures tentatively suggest that the market is beginning to stabilise at these lower levels.
Heading back to pre-Budget levels of demand is largely unexpected. Where a lot of retirees would have previously been obliged to purchase an annuity, more will be able to exercise the new freedoms to withdraw larger amounts or opt for income drawdown – and it's anticipated that this, in particular, will see a significant increase in demand.
A leading pensions provider has predicted a five-fold increase in the demand for income drawdown products from next April, when the new freedoms are introduced. Standard Life expects around 30% of retirees to choose such products, a significant increase from the 6% who do so currently, suggesting that many are looking forward to being able to access their pension savings more flexibly.
Income drawdown allows retirees to withdraw some of their pension savings as income while keeping the remainder invested. They're still in control of their pot, unlike with annuities, where all your savings are used to 'buy' an annuity that will give you a guaranteed lifetime income. There are no such guarantees with income drawdown, and if you withdraw too much there's the risk your pot could run dry, but it seems that many will be willing to take that risk for the trade-off of more control and flexibility.
However, it seems that those approaching retirement may have more money to play with when they make their income decisions. IRESS' figures show that the average pension pot for annuitants at retirement is at its highest level since pre-April 2012, hitting £72,134 in September. This is largely down to the increasing preference for smaller pots to be unlocked rather than annuitised, which has helped to boost the average. As a result, the average pot size rose 4.9% in September, compared with the typical size of £68,779 in August. On an annual basis, the average pot stands 19.7% higher than a year ago (£60,254).
Perhaps one of the most unwelcome side-effects of the Budget announcement is the rapid drop in annuity rates that have followed. In September, standard annuity rates fell to their lowest level since July 2013, now standing at 5.28% after three consecutive monthly falls. Enhanced annuity rates have followed a similar trend, with Moneyfacts' figures showing that the average income paid from a £10,000 pension pot has fallen by 2.4% in the quarter, and by 3.8% since the Budget announcement.
That could equate to a significant loss of income, and is perhaps fuelling the desire for retirees to seek alternatives. It's a bold new world for pensions – not only are there an increasing number of options, but the freedoms mean that retirees can flexibly access more of their cash than they could previously, putting pension savings back in the control of retirees themselves.
If you're approaching retirement, you need to consider your options. Consult our no obligation annuity planner to discuss the possibilities.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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