A two-expert approach

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Off the peg but on budget

A two-expert approach

Since George Osborne announced his radical shake-up of the pensions system in March 2014, allowing savers greater flexibility in how they access their pension fund assets, annuity sales have seen a dramatic decline while appetite for income drawdown has been on the rise.

For example, FTSE 100 life insurer Legal & General recently reported a 61 per cent decline in sales of individual annuities since the introduction of the new pension freedoms, compared to the same period in the previous year. If the experience of Australia in the wake of its own comparable pension reforms two decades ago is anything to go by, annuity sales could see a further contraction: Australian annuity purchases dwindled to around 4 per cent of their pre-liberalisation level.

While there has been a lot of focus in the media in the run up to the introduction of reforms on the cashing in of pension assets, with concerns over the potential use of retirement funds for holidays and luxury items, to date the evidence suggests that the sums of money being withdrawn from pensions are modest.

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It is of course early days but data collected by the FCA six months in to the new regime found that 82 per cent of uncrystallised fund pension lump sum withdrawals were in respect of pension funds of less than £30,000. Encashment of small pots might make sense for those using these assets to clear debts and mortgages.

While widespread cashing up of larger pensions has not emerged, what has proved a major phenomenon from the reforms has been exponential growth in income drawdown, which has provided a further boost to the Sipp market both through advisers and execution-only platforms.

As financial advisers across the UK will understand, this general shift away from the certainty of a guaranteed income for life in favour of income drawdown is no panacea. It also carries much greater risk for savers that they will exhaust their retirement pots too soon.

Yet, alarmingly, many are going down the drawdown route without advice and in years to come, I fear there will be more horror stories in the weekend press about those left in dire straits in retirement through poor investment decisions than tales of those who blew their retirement resources on sports cars and holidays.

Countless studies have repeatedly shown that most people woefully underestimate the scale of the financial resources they will need to adequately finance their retirement, with a recent study by BlackRock indicating that those aged 25 to 34 years were on average miscalculating the pension pot they will need at retirement by £373,000.

Much of this is down to savers underestimating their life expectancy, basing it around those of close relatives such as parents and grandparents and not fully comprehending the significant improvements in UK life expectancy that have arisen from advances in medical science and improved healthcare. While most of us would agree that improved life expectancy is good news, longevity risk is one of the biggest financial hurdles facing UK savers.