Drawdown squeezing out annuities even further FCA figures show
6 November 2017
The latest FCA product sales data has shown a dramatic drop in annuity sales, while drawdown products have soared since the introduction of the pension freedoms.
In the second quarter of 2017, annuities accounted for less than a quarter of all decumulation product sales, while income drawdown accounted for 76% of sales.
A total of 13,875 annuities were sold in the period April-June, in comparison to 42,776 income drawdown products. This compares to 38,337 annuities in the same period of 2014, and just 18,952 drawdown product sales.
Tom Selby, senior analyst at AJ Bell, said the data confirmed the “immediate and dramatic” impact the pension freedoms have had on the pensions market.
He said: “In 2015, annuity sales fell off a cliff in favour of income drawdown and in the latest data for 2017 the trend is even more pronounced with income drawdown representing three quarters of product sales.
“Until there is a change in underlying economic conditions and a boost to gilt yields to underpin guaranteed income rates, this trend is likely to continue.
However, for many people an annuity will remain the most appropriate option, at least for part of their retirement income, so it is important this market doesn’t erode into extinction.”
Commenting on the data, Steven Cameron, pensions director at Aegon, said: “In recent years we’ve seen profound policy and economic changes affecting the saving and investment products we all buy, most notably pension freedoms, auto-enrolment and super-low interest rates.
“The pension freedoms have delivered a huge blow to the annuity market and a boost to drawdown as people switch to access their savings in a far more flexible way. Unlike a one-off annuity purchase, drawdown requires ongoing decisions and financial advisers have a key role to play in protecting customers through both initial and ongoing retirement advice.
“Meanwhile the government’s auto-enrolment initiative has meant far larger numbers of people are saving into a pension, with saver volumes more than twice as high as before the policy’s introduction. However, these figures hide the inadequacy of individual contributions, and boosting levels may be the next big opportunity and challenge for advisers.”
The figures also showed a drop in ISA purchases, reflecting the poor cash rates in recent years. In the third quarter of 2007, ISA sales exceeded 115,000, but this number dropped to just over 75,000 in the second quarter of 2017.
Cameron added: “There also seems to be a clear link between interest rates and ISA sales, where cash ISAs have dominated volumes. Since the Bank of England started cutting interest rates in the summer of 2007, ISA sales have fallen, despite the increased ISA allowance. The proportion of ISAs sold with advice has also tumbled.”
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