Increased focus is set to fall onto risk warnings and suitability considerations for drawdown when new pension freedoms come into force next year, as data show pot sizes already shrinking significantly in the immediate aftermath of the radical reforms being announced.
According to figures compiled by Prudential from Association of British Insurers data, sales of drawdown contracts increased by 73 per cent in the second quarter compared to the previous year, however the average pension pot assigned to drawdown fell 8.4 per cent.
The research shows the average drawdown pot size in Q2 2014 was £70,500, compared to £79,400 in Q1 2014. A year ago in Q2 2013 the average drawdown pot was £77,000.
During the second quarter the amount of new drawdown contracts sold rose to 9,498 with combined value surging to £669m, up from 6,132 worth £487m in the first quarter and from 5,476 contracts worth a combined £425m a year earlier.
The figures come after government projections annexed to the draft rules for the Taxation of Pensions Bill predicted around 130,000 will seek to access to access their pension flexibly from April, compared to 5,000 who currently enter ‘flexible’ drawdown each year.
Many have suggested this will mean many more mainstream consumers, which are currently assumed to have too little saved to be suitable for drawdown, will seek to use the product instead of going into an annuity. This has in turn given rise to calls for the regulator to revise its risk warnings and regulatory approach for the product.
Stan Russell, head of retirement income at Prudential, said he believes that “drawdown will take off massively”.
Greg Kingston, marketing director at self-invested pension firm Suffolk Life, also cited the smaller pots coming through to drawdown as he countered popular suggestions that Sipps will benefit long term from the changes to pension rules.
He acknowledged that there would be more money going into Sipps, but said the influx of investors would be those with £50,000 to £60,000 to invest rather than the traditional £100,000 or more, and they would probably seek to withdraw this within a few years.
Mr Kingston said: “Lots of investors won’t keep their Sipps for ten, fifteen, twenty years. A good deal of them will be those customers we said that might have £50,000-£60,000, and will then spend the next two or three years withdrawing their money perhaps in full.”
He added this is a “huge cost” to a Sipp provider to set up a new customer and these investors’ income requirements may be a monthly income change or to take out a payment ad-hoc, which is “not a profitable model.”
He added: “Yes, there could be more Sipps but I don’t think that is necessarily of benefit to the Sipp market.”
He was responding to comments from John Moret, a Sipps expert and principal of consultancy Moretosipps, who had told FTAdviser that the Sipp market will benefit from the radical changes in particular because self-invested personal pension vehicles are ‘experts’ in drawdown.
He predicted that the changes meant the Sipp market will double in size adding £150bn in assets by 2017.
Prudential’s research also revealed that fixed-term annuity pots are also seeing deceasing with the average size falling to £53,400 in Q1 2014 compared to £71,200 in Q2 2013. The average fixed-term annuity pot fell even further, to £50,400, in Q2 2014.
However, the mean pot size to buy a ‘normal’ annuity has been increasing, standing at £38,600 for Q2 2014 and £34,500 for Q2 2013.
ruth.gillbe@ft.com
