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Annuity sales post-pension freedom

This article is part of
Guide to Guaranteed Retirement Income Options

Many clients were keen to take all their money out as cash, but changed their mind once they were aware of the potential tax implications.

Almost £2.5bn worth of payments have been made to customers in the first three months since the new pension freedoms came in, according to the Association of British Insurers.

The trade body’s figures for April, May and June showed that £2.3bn was used to buy nearly 37,500 regular income products - either annuities or income drawdown products.

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The research found:

• £1.3bn was paid out in cash lump sums, with an average payment size of just under £15,000; and

• £1.1bn has been paid out via 264,000 income drawdown payments, an average payment of nearly £4,200.

Meanwhile, for funds being invested into drawdown products and annuities:

• £1.3bn was invested in 19,600 income drawdown products, with an average fund size of almost £68,000;

• £990m was invested in around 17,800 annuities, making the average fund invested just over £55,600; and

• 45 per cent of customers buying an annuity changed provider, while this figure increased to 55 per cent for income drawdown purchases.

Yvonne Braun, the ABI’s director for long-term savings policy, says: “Annuities, which guarantee an income for life, and income drawdown are proving attractive to those with larger pension pots.”

The changes made once savers fully understood the ramifications truly highlights the value of ‘at retirement’ advice.

Earlier this year, LV created a retirement scenario modelling tool that allows advisers to explore the full range of options with their clients.

It allows advisers to project how long a client’s money will last, how long the client will be expected to live, and which type of product or combination of products might be most appropriate.

It also enables advisers to create a detailed retirement options report for their clients based on the level of income they want to achieve, to include the amount of flexibility or guarantee they require dependent on their individual needs, risk appetite and tax position.

A logical consequence of moving away from the nominal guarantees that annuities can provide (security of income for life, spouse protection, index-linking, etc) is that as savers draw near retirement there will be a strong demand, in retirement, for capital protection and certainty of income to meet investment risk and capacity for loss worries.

Central to any decisions about a client’s retirement income is understanding and evaluating their capacity for any loss.

Simon Massey, director of wealth management at Metlife UK, says research among consumers approaching retirement reveals that 50 per cent said a 10 per cent fall in the value of their retirement savings would have a major impact on their retirement planning.

That increases to 52 per cent among those aged 55 to 64.