Five lessons learned in a year of pension freedoms


A year after the pension freedoms came into effect, Retirement Advantage is highlighting the way consumers and the industry have responded, while cautioning that more work is needed to ensure people get advice and shop around to get the best outcomes.

Andrew Tully, Pensions Technical Director at Retirement Advantage, commented: “The pension freedoms have made people sit up and think about their pensions in a different way and this has spurred the development of new products. Although it’s clear people value the additional flexibility, we haven’t seen a swathe of retirees splurging their savings on Lamborghinis.

“Perhaps surprisingly, the biggest winner over the past 12 months has been the annuity. The predicted demise of the annuity was premature as securing a guaranteed income is still favoured by many. Annuities are now being used in different ways, using ‘money-back’ guarantees and often combined with drawdown in new blended products.”

1. The need for certainty still trumps everything

Retirement Advantage’s research has found that certainty was ranked as the top priority for over-50s when thinking about income in retirement (43%), followed by flexibility (33%)1. This hierarchy is reflected in customer purchase decisions. Annuity sales are beginning to see a revival of fortune, with the number sold outstripping drawdown products for the first time in Q4 2015, with 21,200 sold, worth £1.1bn, compared with 19,700 drawdown policies, worth £1.4bn2. 

Tully commented: “Knowing that there is a guaranteed income coming in to pay the bills continues to be a real comfort to many retirees. Even among customers taking advantage of the blended products now available, we’ve found that 60 per cent of their funds are allocated to the guaranteed annuity element.”

2. Death benefits gave annuities a new lease of life

Tully continued: “It is the change to death benefits available within annuities which has led to people seeing them in a new light. Where previously guarantees were only available for up to 10 years, since last April providers have offered longer guarantees of up to 30 years or 100 per cent value protection. These improvements address the most significant historical criticism of annuities as they provide confidence that families will get their money back, whatever happens. Three-quarters of our annuity applications include some form of guarantee, which increases to over 90 per cent when annuities are purchased within drawdown.”

3. Shopping around became even more important

Retirement Advantage is warning that there is a significant risk of more people missing out on the best outcomes following the introduction of the new freedoms. More than two-fifths (42 per cent) of drawdown customers and almost two-thirds (63 per cent) of annuity customers did not use regulated financial advice in Q3 20153.

In addition, 58 per cent of income drawdown customers and 64 per cent of annuity customers stayed with their existing provider3. Retirement Advantage calculates that, in the first six months of pension freedoms, those who did not shop around for their annuity will collectively miss out on £104m of income over the course of retirement4.

Tully commented: “People are failing to seek advice and therefore not shopping around for either an annuity or drawdown product. This situation has actually got worse since pension freedoms and the market is clearly failing consumers. Not only are those purchasing annuities missing out on the best deals, but there is a real risk that retirees will go into drawdown who don’t have the necessary capacity for loss or a suitable risk appetite. While drawdown is not a one-off purchase, it is still important that retirees seek professional advice as they could easily be caught out by high-charging or complicated products.”

4. The scammers came out in force

Pension scams continue to plague the market with recent research5 revealing that one in three people (35 per cent) aged 55 or over has been targeted by a potential pension scammer in the past three months. These consumers have been offered free pensions advice or investment opportunities by phone, text or email.

Tully commented: “Scammers continue to prey on certain groups, using increasingly sophisticated and convincing ways of trying to defraud large amounts of cash from people’s pensions. We all need to be on constant guard: if an opportunity sounds too good to be true, it almost certainly is.”

5. A blend of annuity and drawdown could be the answer

Looking ahead, Retirement Advantage predicts that the new blended products, such as The Retirement Account, will become increasingly popular as retirees seek to combine the certainty of an annuity to provide income for essential needs with the flexibility of drawdown to provide money for one-off costs or emergencies.

Tully commented: “We’ve already seen strong demand with over £350m in quotes for our new Retirement Account in just four months. This shows people want to combine a guaranteed income with the option to dip in and out of savings as necessary, within one product.”

Click here to find out more about The Retirement Account

1. Research was conducted by YouGov Plc. Quantitative fieldwork was conducted from 20/05/2015–25/05/2015 and 06/08/2015–11/08/2015, with each wave surveying more than 1,000 UK adults aged 50+ who have a DC pension and are not in retirement.

2. Click here to read full article

3. The calculation is based on the number of people who bought an annuity in the first six months of pension freedom, of which 60 per cent (or 24,360 people) did not shop around and get the best rate.

4. Research was conducted by Consumer Intelligence from 25/11/2015–06/12/2015. Online interviews were conducted with 610 people over the age of 55 who hold private pensions.