PensionsSep 11 2014

Annuity sales down by a third: ABI

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Sales of annuities have fallen by more than a third between the first and second quarter of 2014, although the average pot size of an annuity is bigger as more people with smaller pots take cash following the increased limits announced in the Budget.

The latest retirement income market statistics from the Association of British Insurers also revealed there has been an increase in sales of income drawdown contracts, but with a smaller average pot size than before, as some providers reduce their minimum fund size for drawdown in line with the policy shift towards pension flexibility.

Figures taken from ABI members also showed a greater proportion of annuities are now internal, with more of those with pots of less than £5,000 switching.

A higher proportion of larger pots are being used to buy internal annuities, something the ABI suggested is likely to be due to people continuing to take advantage of guaranteed annuity rates.

The proportion of enhanced annuities purchased, as a proportion of total sales, remains unchanged, but of the external annuities sold, a higher proportion are now enhanced.

These type of enhanced annuities also make up a larger proportion of annuities bought with small pots.

Yvonne Braun, head of savings, retirement and social care at the ABI, said the data suggests customers with smaller pots have immediately started to use the new freedoms to take their cash lump sum.

She said: “The data also shows where customers with small pots choose to annuitise they are increasingly taking enhanced annuities.

“Although it is too early to determine how customer behaviour will continue to evolve between now and when the Budget reforms come fully into effect in April 2015, there are still a significant number of savers who will want the regular income provided by an annuity.

“We would expect that many will choose to annuitise later as a result of the new measures.”

Mark Stopard, head of product development at Partnership, said the figures highlight that enhanced annuities are increasingly finding favour with those who want a guaranteed lifetime income which takes into account personal medical or lifestyle circumstances.

He said: “While some pundits have suggested that those with medical conditions will simply choose to cash in their pension pots, these figures indicate that people are actually taking a more prudent long-term view.

“Although today’s figures do show some positives, there is some cause for concern if you look at the marked difference between internal and external sales. Not only are internal sales only down by 12 per cent (- 40 per cent for external) but just 8 per cent of internals sales are for enhanced annuities (59 per cent external).

“This does seem to suggest that some providers are ‘making hay while the sun shines’ and a number of retirees could receive significantly less income in retirement than they deserve.”

Alan Higham, retirement director for Fidelity Worldwide Investment, said the ABI data showed several surprising trends.

He said: “Worryingly, there has been a big rise in external annuities sold in the second quarter to people with pots below £10,000 – as they have could have taken the whole lot as a tax free lump sum, they almost certainly did not get the best value.

“This begs the question whether there has been good sales practice by non-advised annuity firms; the regulator may want to take a closer look at this.”

He also pointed out that the data shows there are a record 12 insurers offering enhanced annuities on the open market, accounting for nearly 60 per cent of annuities sold, yet only 8 per cent of internal annuities are bought on enhanced terms.

Mr Higham said: “While reasons are not clear, it is important that insurers who offer enhanced annuities through the open market option also make sure they collect the medical data on their own customers to ensure they are buying the best products available.

“Unsurprisingly, the numbers of people buying annuities have fallen since the first quarter but while open market sales have dropped by 46 per cent, internal annuities have fallen by just 29 per cent, which indicates that a significant number of consumers are still not shopping around.

“While the Budget changes may have disturbed the market, more is needed to encourage this behaviour.”

Earlier today, figures from Investment Life and Pensions Moneyfacts showed that annuity rates experienced their biggest monthly fall for three years during August, with the average annual income from a level annuity for a 65-year-old without guarantee, based on a £50,000 pension pot, down by 2.6 per cent during the month from £2,874 to £2,797.