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Income drawdown taking over

Income drawdown taking over

Category: Pensions

Updated: 17/07/2015
First Published: 17/07/2015

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The pension reforms have given retirees complete freedom in how they spend their pension pot, and research from the Association of British Insurers (ABI) has revealed the extent to which people are taking advantage. Not only was almost £2bn withdrawn from pots during April and May, but for those taking an income, it seems as though there's a definite shift towards drawdown…

Growing popularity

The figures show that savers took payments worth £1.8bn from their pensions during the first two months of the reforms, with £1bn of that being in the form of 65,000 cash payments. The average pot withdrawn was £15,500, suggesting that those with smaller pots are seeking to take advantage of the new freedoms and withdraw their savings in one go.

During the same period, around £1.3bn was used to buy 22,000 regular income products – either an annuity or drawdown plan. But, this is where it gets really interesting. Over half of this total amount was used to buy income drawdown products rather than annuities, a sharp contrast from previous norms, when annuities traditionally comprised the bulk of the market.

For example, in 2012, annuity sales were at their peak and totalled £1.2bn a month, with just £0.1bn being put into drawdown. This highlights the clear shift to income drawdown in the wake of the reforms, with the new rules giving more retirees the opportunity to choose it as an income solution.

The figures went on to reveal that the average fund put into income drawdown stands at £69,900, while the average annuity purchase is £55,750, both of which are far higher than the size of the average pot taken as cash. This suggests that those with smaller pots are cashing out while those with bigger pots are buying incomes, a trend that's perhaps expected given the scope of the reforms.

Although studies have shown that withdrawing the cash could lead to a worse retirement outcome, those who have small pension pots won't be able to generate much of an income with their savings anyway. Therefore, the chance to withdraw their pot could be appealing – the average pot of £15,500 could go a long way to reducing debt, for example, paying off the mortgage or making vital home improvements that could lead to a more enjoyable post-work experience.

"This is an important reminder that tens of thousands of people are successfully accessing the pension freedoms as intended, and on the whole the industry has risen to the challenge of giving customers what they want," said the ABI's Dr Yvonne Braun. "It also highlights an increase in the number of people putting money into income drawdown products that can take advantage of the new freedoms."

Your choice

So, are you one of them? For many people, income drawdown could be worth considering, while others may want to stick with the security of an annuity. Alternatively, withdrawing the entire pot as cash could be more appealing – it all comes down to individual choice and circumstances, but just make sure you understand the risks involved with each and get the advice you need to be sure you're making the right decision.

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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