Pension ‘dash for cash’ to be offset by annuity comeback

Pension ‘dash for cash’ to be offset by annuity comeback

Annuity sales could double by the mid 2020s, offsetting the pensions ‘dash for cash’ of late, according to Hargreaves Lansdown.

In a report published yesterday (13 December) the firm predicted investor demand for annuities could increase dramatically within the next 10 years after remaining subdued in the short term.

The pension freedoms rules, implemented in 2015, gave savers with defined contribution pensions the option to withdraw their funds from age 55, subject to tax paid at their marginal rate rather than the 55 per cent charge previously in place.

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Many people rushed to withdraw their cash, particularly those with small pots. 

Figures released by HM Revenue & Customs in April showed 393,000 people had taken out £6.45bn from their pension pots in the 2016 to 2017 tax year - 48 per cent more than in the year before when it was £4.35bn.

However, there was an indication the rate of increase in the amount of cash being taken from pensions had slowed down. 

In the first quarter of 2017 a total of £1.59bn was taken, compared with only marginally less (£1.56bn) in the quarter preceding it. 

The tax take from pension freedoms was estimated by the Office for Budget Responsibility (OBR) in March to amount to £1.6bn in 2017-18,  £1.1bn in 2016-17 and  £1.5bn in 2015-16 

But this was revised down £500m in November reflecting “individuals spreading their withdrawals over a shorter period than we had previously assumed,” the OBR said.

The number of annuity providers is estimated to have halved since the freedom reforms, which effectively eliminated the need for those with small pots to buy the guaranteed product.

But Hargreaves pointed out that while currently a mere 12 per cent of people buy an annuity, 43 per cent of people approaching retirement envisage buying one.

Hargreaves based its report on its own data as well as Censuswide survey data that polled 1,001 55-65 year olds with defined contribution pensions which had not yet arranged a retirement income. 

Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “We anticipate demand for annuities will pick up again, in fact, it is more a matter of when rather than if. 

“Our best estimate is we could see significant growth in the market around eight to 10 years from now as investors’ demand increases in response to their changing circumstances.”

The graph shows the attitudes of would be annuity investors

The firm pointed out pension freedoms had coincided with the alignment of low interest rates and the retirement of the baby boomer generation, which was due to change.

As that generation gets a diminishing appetite for investment risk they will simultaneously be eligible for increasing rates due to their advancing age and likely decline in health, it said.

But investors are not willing to buy at any price, Hargreaves found.

Almost half of those interested in buying an annuity would do so providing they could obtain a rate of income of 6.5 per cent - in other words a pay out of £6,500 a year for every £100,000 invested.