Budget reforms drive massive move away from annuities and into income drawdown

ABI figures show 50% year on year fall in annuity sales and >50% rise in income drawdown which carries high fees

Fall in annuity sales would be even greater if pension firms allowed customers to use the new freedoms properly

Pension providers still failing to put customer interests at the heart of their business

by Dr. Ros Altmann

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The Association of British Insurers has just released figures that show the dramatic drop in annuity sales following the Chancellor’s Budget bonanza for pension savers. The figures show that, when they do actually have a choice, customers do not want to buy annuities. The Budget moves may help tens of thousands of people obtain better value from their pension funds and allow them to make better use of their savings.

Number of annuities sold falls by nearly half: Relative to the previous year, the number of annuities sold in the period April to June 2014 was 48% lower than the same period in 2013. The value of annuities purchased was down 42% (to £1.8bn).

Proportion of drawdown relative to annuity sales value doubles: In the same period, the number of new income drawdown products sold increased by 55% and the value of funds used to buy drawdown rose by 37% year on year. As a proportion of the value of annuities sold, the value of drawdown products was 37% in Q2 2014, doubling from 16% in 2013. Clearly, income drawdown has become much more popular for pension savers, as more of them realise they do not have to buy an annuity.

Annuity sales still propped up by providers failure to offer customers the new freedoms: These figures do not give the full picture of savers’ attitudes, however, because pension providers are not yet allowing their customers to take proper advantage of the new pension freedoms that have been introduced. Immediately after the Budget, the Treasury announced that people would no longer be required to buy either an annuity or drawdown product within six months of taking their tax-free cash out of their fund. The aim of this was to ensure that people would be able to take their tax free cash now and then wait until after next April to be able to take advantage of the full freedoms if they wished to. However, pension providers have refused to the tax free cash without immediately transferring the rest of their customers’ funds into an annuity or drawdown. Therefore, many savers are still be forced to buy annuities even though this may not be right for them.

Trends in enhanced annuities remain troubling: One particular concern is that the proportion of annuities that reflect people’s health properly has only increased from 25% to 29% of products sold. The sales of enhanced annuities have increased, but remain only a small minority of products purchased. For those who fail to shop around and buy from their existing provider, only 8% receive an enhanced rate, compared with 59% of those who buy from an external company. It is so important that people ensure they buy the right kind of annuity that reflects their own circumstances.

The rise in drawdown forces customers to pay high fees: The publicity surrounding the Budget changes has helped many people to realise they will no longer have to buy an annuity, so they are increasingly putting their pension fund into an income drawdown policy so they will be able to benefit from either new products or full withdrawal next year. Ideally, they really would be best to just take tax free cash and leave the rest of the money alone until 2015, but the pension firms are not allowing this. Therefore, there has been a surge in income drawdown sales which means customers are incurring large costs. In other words, the inflexibility of the pension providers in denying customers the new freedoms is forcing those that were relying on taking their tax free cash, perhaps to repay their mortgage or for other pre-planned spending, to incur significant charges that they should not need to bear.

Customers really need expert advice before guidance starts – an opportunity for IFAs: It is vital that, in the coming months, pension firms do make the necessary investments in customer service staff and new systems that can allow pension savers to benefit from the new pension rules. There is also a significant role right now for financial advisers, who should be able to help people make best use of the opportunities available to them. There is no free guidance in place yet, so the need for advice is even greater for those who are reaching pension age in coming months.

When will pension companies really put customer needs at the heart of their business?: It is very disappointing to see that UK pension providers have not been willing or able to allow their customers to benefit from the freedom and flexibility that the Chancellor intended them to enjoy. If the industry really wants to restore its credibility, it needs to invest in the systems that will ensure customer needs and wants are catered for properly. There are worrying indications that firms are failing to cope with customer calls and this is a clear indication of the systemic failure to put their customers at the heart of their business.

Table 1: Changes in annuity sales and drawdown sales

	Q2 2014	Q2 2013	% change year on year
Annuity sales – number	46,368	89,896	-48%
Annuity sales – value £bn	£1.8bn	£3.1bn	-42%
Average fund size	£38,600	£34,500	+12%
Income drawdown sales – number	9498	6132	+55%
Income drawdown sales – value	£669m	£487m	+37%
Average drawdown fund value	£70,500	£77,700	-10%
Drawdown value as % of annuity sales	37%	16%	doubled

Table 2: Trends in enhanced annuities

	Q2 2014	Q2 2013
% of annuities bought from existing provider	55%	49%
% enhanced annuities out of total annuities	29%	25%
% enhanced annuities bought externally	59%	47%
% enhanced annuities bought internally	8%	7%

ENDS