Annuities versus drawdown

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.

There are now about six providers of annuity products in the open market.

And although the freedoms has been partly positioned as a way to tackle this problem by bringing more choice into the market, it has equally presented its own challenges.

Income for life

Different types of people are entering into the drawdown market and providers have to work harder than ever to understand their customers’ specific needs, both in the direct and advised channels.

Mr Selby says: “At AJ Bell we have two parts; an advised part, where you have the engaged customer working with financial advisers to devise income solutions. For them the pension freedoms are a huge opportunity.

“For direct customers coming to us, equally the pension freedoms provide lots of flexibility. What providers like us are working through is how to give them the tools and guidance they need to use the freedoms in a way that works for them and means they can manage their pensions through retirement.

Consumers do not understand what a drawdown or annuity is, but when you ask them to describe what they want or need in retirement, they talk about something to replace their salary, and out pops a guaranteed income for life.Stephen Lowe

“Those are the things we are trying to drive home to direct customers. While the freedoms provide flexibility, it is still the main aim of most people that their pension provides them with an income that lasts through retirement.”

The annuities market may no longer be the dominant player but it is not in danger of disappearing any time in the future, despite the decline in demand for annuities driven by market conditions and an increase in the availability of other choices.

Stephen Lowe, communications director at Just Group, notes: “Consumers do not understand what a drawdown or annuity is, but when you ask them to describe what they want or need in retirement, they talk about something to replace their salary, and out pops a guaranteed income for life.”

Mr Selby adds: “There were around 80,000 annuities that were being sold after the pension freedoms. It is important to stress annuities remain the appropriate choice for a lot of people.