Time flies - it is now 21 months since pension freedoms were introduced and with them the radical reshaping of the sector.
In brief, in April 2015 the tax rules were changed to give over-55s greater access to their pensions.
Drawdown of pension income is now taxed at marginal income tax rates, rather than the previous rate of 55 per cent for full withdrawals (after the 25 per cent tax free lump sum).
Over-55s now have six options available to them; 1) leaving the pension pot untouched 2) purchasing an annuity 3) getting an adjustable income (flexi access drawdown) 4) taking cash in chunks (uncrystallised funds pension lump sum), 5) cashing in the whole pot in one go and 6) mixing any of the options.
To help them deal with all these new choices, Pension Wise was born, giving individuals access to free and impartial guidance via the phone or face-to-face, though advisers remain the frontline for many trying to navigate the options.
Retirement decisions made in the last 21 months have had a major impact on the pension sector – namely many more people are using income drawdown and a lot less people are buying annuities (see table below).
Table 1: FCA data on pension freedoms
Mike Morrison, head of platform technical at investment platform AJ Bell, warned of two main dangers arising from this new state of affairs.
Firstly, that people end up in income drawdown who do not understand it and perhaps would have been better served by the guaranteed income delivered by an annuity.
“It is still early days though so it will be interesting to see if the market settles down and people start to look at annuities again when they really think about what they are trying to achieve with their pension fund,” he said.
The second, and related, danger is that those seeking an annuity have much less choice on the open market than prior to April 2015. Post-pension freedoms retirees shunned annuities, leading some large providers of the financial product to withdraw.
Standard Life stopped offering annuities to new customers on the open market (though still to existing Standard Life customers) in November 2016, citing a dramatic drop in demand.
Prudential and LV have also stopped selling their annuities on the open market in the last year, and Aegon has pulled out of the sector altogether.
“One danger is that because of the rapid move away from annuities we may be left with an uncompetitive market. This is not a good outcome for consumers,” Mr Morrison said.
“Maybe if interest rates do start to rise at some point next year and annuity rates improve, we might see people returning to annuities for at least part of their retirement income and hence some competition return to the market.”