Fresh data from the Association of British Insurers will stoke ongoing debates over drawdown risk ahead of radical pension reforms, as sales of income drawdown soared in the third quarter while average pot size tumbled 24 per cent compared to last year.
Latest retirement income data shows that the number of drawdown contracts sold by ABI members has more than doubled compared to the same period last year, while the number of annuities sold fell by 56 per cent compared to Q3 2013.
While drawdown sales hit new highs, the average pot size reduced, demonstrating that drawdown is opening to a wider market, according to the ABI.
The average income drawdown pot size in the third quarter was £63,100, down 24 per cent year and down around 10 per cent from £70,400 in Q2. This continues the downward trend from earlier this year, meaning more focus is likely to fall on risk warnings and suitability considerations.
Earlier this month during a committee hearing on the Taxation of Pensions Bill, David Geale, director of investment policy at the FCA, suggested the regulator now considers £50,000 to be a minimum threshold for drawdown suitability, but that product innovation could push this lower.
He said: There is no reason why over time flexible access products need to be poor value for money or to represent a high element of risk: it is about people understanding what they are getting into.”
The value of drawdown contracts sold by the association’s members is around half that of the value of annuity sales, compared to 14 per cent a year ago.
The number of annuities sold - down 14 per cent on the last quarter - has fallen further than the value of those annuities however, suggesting that more people with smaller pension pots are deferring or taking cash.
While external annuity sales have fallen, internal annuity sales have remained at similar levels, which the ABI said reflects the fact that people with guarantees continuing to take advantage of them.
This means that there are now a greater proportion of internal annuities (65 per cent) and a smaller proportion of annuities are enhanced (22 per cent).
Andrew Tully, pensions technical director at provider MGM Advantage expressed concern at the drop in external sales and enhanced annuities and warned that the open market option message appears to be lost in translation with the noise around the freedom and choice agenda.
“Internal sales are holding up, while the external, shopping around, market is down. This means people are not receiving the better value provided by enhanced annuities.
“If people decide not to take up the offer of free guidance or look for advice, we need to find a way of ensuring a second line of defence protects consumers and ensures they don’t end up with products which do not fit their needs or provide poor value.”
peter.walker@ft.com
