Out-Law News 2 min. read

Annuities still an attractive choice for older retirees, says expert, as FCA publishes updated pension access data


New figures on access to contract-based pension scheme savings published by the Financial Conduct Authority (FCA) prove that annuities are not dead, despite new rules giving retirees more flexibility over how they access their savings, an expert has said.

Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that the figures "suggested that annuity purchase is more attractive the later you access your pot", with the majority of annuities purchased between July and September 2015 going to consumers aged between 65 and 69. By contrast, 40% of consumers who accessed their pension using drawdown over the same period were aged between 55 and 59, according to the FCA's latest retirement income market data.

"This supports the emerging theory of a journey through retirement, with different blends of cash, staying invested and annuity purchase depending on where you are on the journey," Laight said.

"So an individual may withdraw some cash to begin with to fund a holiday, car or new kitchen, with the remainder staying invested and drawing cash from investments as income. Later, that capital can be used to secure income through an annuity, perhaps in stages between the ages of 63 and 70," he said.

According to FCA figures, 23,385 of the 178,990 pensions accessed by consumers over the review period were used to purchase an annuity, compared to 54,604 used for income drawdown. Over 60,000 pension pots were accessed either partially or fully as an uncrystallised funds pension lump sum (UFPLS), while over 40,000 smaller pots were withdrawn in full.

Nearly 70% of pensions accessed during the review period were cashed out in full, with individuals aged between 55 and 59 making the highest level of withdrawals as a percentage of their pension pot. However, 88% of the pension pots that were fully cashed out were below £50,000, accounting for 54% of the total value withdrawn in this way, according to the figures.

The FCA said there was a reduction in the number of pension pots accessed using each method when compared to the previous review period "for everything except annuities". However, it noted that there were some inaccuracies in the way in which the number of annuity purchases was recorded between April and June 2015, meaning that "the trend between quarters is unlikely to be as marked" as shown by the figures.

Of those customers purchasing annuities, 64% did so from their pension provider compared to 58% purchasing a drawdown product, the FCA said. Many of those accessing pensions with guaranteed annuity rates (GARs) attached to the policy did not take up this option, a trend which was particularly marked among those with smaller pots. Only 17% of those accessing their pension savings flexibly told their provider that they had used the government-backed Pension Wise free guidance before doing so, the FCA said.

"Consumers are still sleepwalking into annuity deals without testing the market - in fact, the FCA considers that even its 64% figure understates the problem, with 'active' shopping around being considerably less," Laight said. "How many buy a car without shopping around for the best price? Yet, with pensions, which involve much bigger sums, we still buy without checking for the best deal. The FCA will take a hard look at whether enough is being done to encourage consumers to shop around."

"Providers saw the 2015 reforms as a heaven-sent opportunity to offload many of their GAR promises, and these figures prove the point. The FCA might be concerned that consumers are giving up valuable promises to access the cash now, but this isn't necessarily a bad outcome for the small pot market," he said.

The data used came from providers covering an estimated 95% of assets held in contract-based pension schemes, which are regulated by the FCA. Workplace pension schemes are regulated by the Pensions Regulator.

"It would be interesting to compare the figures here with those from the DC occupational market, and to see whether the same patterns emerge," said Laight. "I suspect that many in the occupational market are being denied the same level of flexible access."

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