The pension freedoms have given customers a wider range of choices on how to make the most of their retirement money, but does more mean better?
In 2015, the introduction of the freedoms was a game changer for the retirement income market.
Prior to its implementation most people were shovelled into annuity contracts with their existing insurers. Annuity sales were dominant and drawdown was a much smaller part of the market.
But since the freedoms there has been a massive reversal.
According to recent FCA figures 33,561 annuities were purchased in the six months to March 2017, a 16 per cent reduction on the same period a year before, while new income drawdown policies entered into and not fully withdrawn were more than double at 83,687, having grown by 4 per cent in the same period.
Freedom and choice
Tom Selby, senior analyst at AJ Bell, says: “Since the pension freedoms, you now have a market where for every one annuity sold by an insurance company, roughly two people will enter into a drawdown market.
“You have gone from a world where people used to go into a contract which guaranteed them a set income for life, to a world where they have a lot of freedom and choice. And they have to take that responsibility alongside their adviser for managing their own withdrawal options and make sure their money lasts as long as they want it to, depending on their priorities.”
What you now have is a vast array of customers going into drawdown, who are disparate in their needs and knowledge and their ability to engage in what is going on.
For a large chunk, their priority is to get their tax-free cash to make big life changes such as doing up the house, spending money on the children or paying for the long-term care of a relative.
Fiona Tait, technical director at Intelligent Pensions, observes: “Twenty to 30 years ago, people were looking for a lifetime income and that was the primary purpose, but what we are finding with the advent of drawdown pension freedoms is people saying at age 55 that they want to rearrange their finances; they would like a lump sum, pay or supplement part-time income.
“At the other end of the scale you have people who have other assets but do not need to take the pension and, in the event of their death, want to pass the money to someone else. There isn’t a typical client anymore and everyone has their own needs.”
The freedoms brought options to a market that was already seeing a fall in the take-up of annuities, as a result of low bond yields.
Following the financial crisis of 2007-08 as the Bank of England started reducing interest rates this, in turn, caused annuity rates to fall and made it more expensive for providers to service annuities, leading to a contraction in the market.