Defined Benefit  

One in three DB transfers still buys an annuity

One in three DB transfers still buys an annuity

One in three defined benefit transfers is still going directly into an annuity even though buying this product is no longer compulsory, pensions consultancy Aon Hewitt has revealed.

Ben Roe, the firm's head of liability management, told FTAdviser around a third of the transfers from schemes his team advises are going into non-indexed annuities.

He said "around a third" of the transfers involved "people swapping their inflation-linked pension through the pension scheme for a higher level of non-increasing pension".

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"Nobody is going out and buying an annuity that is inflation-linked, because they would just be trying to beat what they have got in a pension scheme," he said. 

"But what we do find is that people are swapping the pension protection for a higher level of starting pension."

He said defined benefit (DB) schemes were also increasingly offering such deals themselves through a pension increase exchange, or Pie, whereby you exchange a lower rate of annual increase for a higher pension.

But while he said use of non-increasing annuities to improve income at the earlier stage of retirement was still popular, he said this it had decreased significantly since the introduction of pension freedoms in 2015.

"I'd say this was probably 80 per cent of the transfers at retirement before [pension freedoms], where it is probably down to 30 to 40 per cent of the transfers now.

"But I think the point is there is still a good proportion of people doing this.

"People think that annuities are dead, and that people aren't doing that - that's not what we're seeing in the cases we're involved in," he said.

Ben Smaje, a chartered financial planner and managing director of Kennedy Black Wealth Management, said he was surprised by Aon Hewitt's figures.

He said: "Every conversation I've had about a DB transfer has been in the context of pension freedoms and flexible drawdown. I don't know anybody who is thinking about an annuity."

However, he conceded that his frame of reference was not as wide as that of Aon Hewitt, which acts as consultant to around 700 schemes.

Mr Smaje said it could make sense to invest a DB lump sum in an enhanced annuity if you were in poor health. But in most cases he said it would make more sense to take advantage of the flexibility of pension freedoms, rather than lock the money into an annuity.

Since the introduction of pension freedoms, a large number of providers, including Aegon, Standard Life, LV and Prudential, have exited the annuity market in part or in full in response to plummeting demand.