More than two years on from pensions freedoms, and the new lease of life the reforms have given to income drawdown is no longer quite so eye-opening. Retirees’ shift away from annuities towards the flexibility offered by drawdown products is well-established, as is advisers’ resultant need to confront a different set of challenges.
The interim findings of the FCA’s Retirement Outcomes review, published this summer, confirmed the changing shape of the industry. Whereas 90 per cent of pots went into annuities before the arrival of the freedoms, twice as many are now moving into drawdown compared with annuities.
The regulator’s study understandably focused on the number of non-advised consumers opting for drawdown. But its mooted remedies, including making it easier for consumers to “shop around” and clearly separating the decision to take tax-free lump sums from the need to buy a drawdown product, suggest there could be significant change to come for advisers, too.
One area in which advisers remain front and centre is defined benefit (DB) pension transfers, and the significant growth in the number of retirees cashing in their final salary pots is undoubtedly giving an extra boost to drawdown client numbers.
This year’s survey includes plans from 34 different companies, one more than in 2016, and can therefore be treated as a representative sample of the state of play across the industry. Table 1 shows that the rapid growth seen in 2016 has continued in the latest survey. The total number of drawdown customers across the survey has risen from a restated 257,000 in 2016 to 326,000 this year.
The 2017 figures are not directly comparable with those produced in 2016 – Aviva has not been featured in previous years, but adds 36,000 to the current total this time, while LV overstated its figures in 2016 due to a technical error – but every company featured has enjoyed significant growth over the period. Some have seen customer numbers increase by 20 to 40 per cent: Suffolk Life’s numbers have risen from 8,436 to 10,225, while Barnett Waddingham’s client bank has jumped from 1,843 to 2,563.
The firms with the most clients in drawdown remain the same: Standard Life, with 86,900, and Royal London with 67,000. Both of these figures have also grown by 20 to 25 per cent over the past year.
It is a similar story for providers’ assets under management. Total stated assets of £64bn do not include some of the larger firms that declined to disclose numbers, such as Aegon, Prudential and Zurich. Add these in and it is possible that the industry sits closer to the £100bn mark in reality. As recently as 2014, the figure sat at just £14bn. The growth is an indication of just how significant pension reforms have proved to be for the drawdown industry.
Table 2 shows the charging structures for drawdown in all its variants. In the vast majority of cases, fees remain the same as 2016 despite the significant increase in assets and customer numbers at most firms.
The minority that have made changes have raised fees, although typically only in line with inflation. A more significant change has been made by Scottish Widows – the firm’s annual charges have risen from between 0.05 and 0.2 per cent to between 0.15 and 0.9 per cent depending on pot size.