Once upon a time, annuities were the most popular way to secure an income in later life, with the vast majority of retirees opting for this form of guaranteed income. However, that wasn't always by choice – many were obliged to do so, until the launch of the pension freedoms in 2015 removed that obligation. This means retirees are now largely free to choose how they spend their pot, yet there are concerns many aren't always making the right decision.
That's according to a review from the Financial Conduct Authority (FCA), which not only highlighted a clear rise in the number of retirees opting for income drawdown, but that many are increasingly choosing this option without taking suitable advice.
The regulator found that twice as many pension pots are now moving into annuities as drawdown, yet 30% of those drawdown products are now purchased without advice, compared with just 5% before the pension freedoms.
Many are also accessing their pension pots early – 72% of pots that have already been accessed are by those under the age of 65 – but worryingly few are shopping around before doing so, with the majority of those customers taking drawdown from their current pension provider. Indeed, 94% of non-advised sales were made to existing customers, which means many retirees are greatly at risk of poor outcomes.
That's because, by failing to shop around, there's simply no way of knowing whether or not you're getting the best deal, and this applies to drawdown as much as to any other financial product. New research highlights this to great effect, revealing that consumers who don't shop around for their pension product could miss out on thousands of pounds.
The figures, compiled by the Pensions Policy Institute for LV=, show that in 2016 there were around 30,000 people who took out an annuity with their existing provider, yet those retirees could have received an average of £4,000 more over the course of their retirement had they switched. This means their retirement income may not go as far as they'd hoped, and this could be an even bigger risk for those seeking income drawdown, whereby income isn't guaranteed and there's the chance of running out of money in later life.
Richard Eagling, head of Pensions at Moneyfacts, explains: "The pension freedoms appear to have merely transferred the problem of a lack of shopping around from the annuity market to the drawdown market. Unfortunately, the stakes are even higher in the drawdown market, and poor decision-making could have even more devastating financial consequences than simply choosing an uncompetitive annuity rate.
"The danger that many individuals entering drawdown could exhaust their funds prematurely becomes even more worrying given the significant numbers that are adopting a DIY approach to drawdown. While income drawdown offers far greater flexibility than an annuity, it requires ongoing monitoring to ensure that withdrawals are sustainable, and transfers the longevity risk onto the individual."
Essentially, this all means that if you're starting to think about your retirement income, get advice! It's one of the most important financial decisions you'll ever make as it'll determine how much income you'll receive for the rest of your life, so it should never be entered into lightly, nor without the right kind of support.
At the very least, speak to your pension provider to get an idea of the options available, but you'll want to go on from that to compare the products available from alternative providers, and should ideally seek independent professional advice. The Government's Pension Wise service could be a great place to start, or contact our annuity advice service for a no obligation chat.
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.