Pension freedoms continue to have a dramatic effect on annuity take-up, with only one in five (22 per cent) people choosing this product to generate retirement income.
The state pension, personal savings and continuing to work all rank above annuities and income drawdown when it comes to generating an income stream in retirement.
A CoreData Research study surveying over 500 respondents found the most popular way non-retired retail investors plan to generate an income stream in retirement is through the state pension, cited by 67 per cent of respondents.
This is followed by other personal savings such as cash Isas, current accounts and savings accounts (40 per cent) continuing to work (34 per cent), income drawdown (30 per cent), property (29 per cent), other personal investments such as stocks and shares Isas (28 per cent) and buying an annuity (22 per cent).
“It is interesting that personal savings including cash Isas rank higher than both income drawdown and annuities while personal investments including stocks and shares ISAs are considered above annuities,” said Craig Phillips, head of International, CoreData Research.
“This indicates traditional retirement income products are being usurped by other tax efficient savings and investment vehicles.”
Mr Phillips added that the increase in the ISA annual allowance from £15,240 to £20,000 in April 2017 will further strengthen the product’s appeal.
He also noted that the dividend allowance cut announced in the March 2017 Budget could encourage savers to place high dividend-paying investments within Isas.
“Isas can present a good option for people looking to generate retirement income because income taken from them is tax-free,” said Phillips.
“But with cash Isas currently offering very poor rates, stocks and shares Isas are likely to be a more attractive option for those willing to accept some investment risk.”
However Tom Selby, senior policy analyst at self-invested personal pension company AJ Bell, warned: "Anyone planning to retire solely on the state pension needs to seriously consider whether they can live on £8,000 a year, which is roughly what the flat-rate is worth in today's prices.
"If they can't, they need to make a plan now and utilise tax-efficient savings vehicles such as Sipps, workplace pensions and Isas to supplement the money they will get from the state.
"Given the paltry returns on offer from cash Isas and current accounts, it is worrying so many people are relying on these vehicles for retirement.
"It is clear from FCA data that drawdown has replaced annuities as the most popular retirement income route for savers. This is no surprise given the extra flexibilities introduced by the pension freedoms. For many people, particular younger retirees who are still in good health, leaving their money invested is an attractive option which allows their pot to continue to grow.
"Stock market risk isn't for everyone, however, and it's vital a competitive annuity market exists in the UK so people who want a guaranteed retirement income can shop around and get a decent rate."
