Annuity sales fell in the year from April 2022 to March 2023, while drawdown remained the top choice for pension savers in the UK, new data from the Financial Conduct Authority has revealed.
Despite a surge in demand in 2021/22, annuity sales dropped by nearly 14% in 2022/23 to 59,163, despite an improvement in rates, as savers continued to choose retirement income flexibility and choice over a guaranteed income for life.
By contrast, over 218,000 new drawdown policies were entered into in 2022/23, a 6% increase on the previous year.
Meanwhile, full cash withdrawals also increased by 6% from 395,235 to 420,727 as the cost-of-living crisis took hold. However, the majority of those withdrawals were of smaller pension pots worth less than £30,000.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said of the drop in annuity sales: “In a period that covered incomes soaring to historic highs it looks like retirees wavered in their decision making, perhaps waiting to see if rates could go higher still. We know they did eventually decide to take the plunge with ABI data showing 2023 was a bumper year overall for annuities.”
The FCA data showed that people are making full use of the flexibilities available to them, nearly 10 years on from the introduction of the pension freedoms. The total number of pension plans accessed for the first time increased by 4.8% year on year to 739, 535, following an 18% spike in the number of pots accessed for the first time in 2021/22.
However, the data showed that drawdown withdrawal rates remain on the high side, with around 40% of plans reporting withdrawal rates of over 8% per year. This figure is far higher than the historical rule of thumb which hovers closer to 4%.
Tom Selby, director of public policy at AJ Bell, said: “These are figures that will inevitably raise some concern among policymakers and are likely, in part, a reflection of the difficult economic circumstances millions of retirees and their families found themselves in as spiralling inflation pressured people’s budgets.”
Selby said the key to making drawdown work is for savers to consider the sustainability of their withdrawal plan, understand and be comfortable with the risks they are taking and review their strategy regularly.
Selby also warned of the tax implications of drawdown. Taking a large withdrawal from a pension could result in an unnecessary tax bill that could be avoided by steadily drip-feeding withdrawals. Furthermore, savers could trigger the money purchase annual allowance, reducing their annual allowance from £60,000 to £10,000.
According to the FCA, 37% of income drawdown plans taken out in 2022/23 were taken without advice or guidance.
Morrissey added: “This could well be a factor behind the high withdrawal rates we are seeing from drawdown plans and people may regret their decision to go it alone. Retirement involves major decision making, the consequences of which will be felt for many years. It’s hugely important that people feel comfortable accessing the support they need to make informed decisions. This could be through a regulated financial adviser or services such as Pension Wise but we also need to see progress on reforming the advice guidance boundary to enable providers to step forward and offer more support.”
