FCA data raises annuity shopping around concerns

Pensions-savings-retirement-piggy bank

The number of people using the pension freedoms to access their retirement pots dropped 13 per cent in the second quarter, but concerns remain the annuity market is continuing to fail consumers.

FCA data for the three months to September 2015 reveals 178,990 pensions were accessed in the second quarter of the freedoms, down from 204,581 between April and June.

Of these, 120,969 (68 per cent) were fully cashed out, although the vast majority (88 per cent) of these were people with small pots worth less than £30,000.

Uncrystallised funds pension lump sums remains the most popular withdrawal method, with 60,600 taking this option, down from 73,063 in the previous quarter.

Some 54,604 (30 per cent) used income drawdown, down from 71,455 in the previous quarter, while 23,385 annuities were sold during the period.

While the annuity sales figure is significantly higher than the previous quarter, the FCA says providers under-reported in Q1 of the reforms “partly due to firms misinterpreting the way in which we were asking them to report the data”.

Just 3,381 “3rd way products” – which includes variable annuities, fixed-term annuities, with-profits annuities and unit-linked annuities – were purchased between July and September.

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Shopping around rates remain low, with just 42 per cent of drawdown customers and 36 per cent of annuity purchasers switching providers.

Hargreaves Lansdown head of retirement policy Tom McPhail says: “It is much easier to stay with your provider under the freedoms than it was before because the transition to retirement through drawdown is relatively seamless.

“But with annuity purchase there should still be a trigger to consider switching provider, so these numbers suggest there is still a significant market failure. If anything annuity shopping around rates are going backwards.”

The regulator has also published details of withdrawal rates during the quarter (see Figure 10, below). The most common withdrawal rate was less than 2 per cent, although a “significant minority” of customers (10 per cent) took a rate of withdrawal of 10 per cent or more of the value of their pot.

Those aged 55-59 had the highest withdrawal rate, with 27 per cent taking an income of 10 per cent or more from their pension.

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The FCA also breaks down the products where advisers are most used by savers. Some 58 per cent of drawdown customers used an adviser, meaning 42 per cent went into drawdown on a non-advised basis.

Meanwhile, some 37 per cent of annuity purchases were made through an adviser.

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. “Tom McPhail says: “It is much easier to stay with your provider under the freedoms than it was before because the transition to retirement through drawdown is relatively seamless”

    And cheaper Tom !!

  2. At least the Mean Average Withdrawal Rates over age 69 look sustainable and possibly even over 65. The current market volatility may cause some angst and panic though – particularly amongst the non-advised sub set.

  3. One of the biggest impediments is that clients (if they wish) cannot research the best rates and then few providers will deal directly with the general public. Too many advisers charge completely unrealistic rates, so it is perhaps unsurprising that the take up isn’t all it should be and people take what is offered from the incumbents.

  4. This is because no real attempt has been made to make the annuity market work. Instead, the product was demonised and then the need to buy it was abolished. Why would anybody expect anything to have changed?

    • Agreed Tom, I provided all the training for a large national company around pension freedoms and possibly the scariest part of it, was that a large number of highly qualified advisers do not even understand what an annuity is, how it works, or why an annuity may well still be a good option for many.

      Although admittedly they did all seem to understand why shopping around was a good idea.

  5. If the FCA is concerned about too few people shopping around for the best/most suitable retirement income product then why does it not mandate OM as the default option? This question has been asked many times yet never answered. All the FCA continues to chant is that the annuity market isn’t working as well as it should ~ so DO SOMETHING about it then instead of gathering ever more data that serves only to confirm what you and we already know. On just what planet do these people live? Clearly not the same one as the rest of us.

  6. Considering the size of the average pots concerned and assuming that those who are accessing the pensions are actually taking the whole pot in one form or another, shopping around is unlikely to provide a big enough difference to make it worth while. That having been said, the FCA have officially stated previously that the vast majority of people COULD CONSISTENTLY have got a better outcome. However they still have not made the OM mandatory default position. If they had done the same exercise with advisers and found that we were giving worse outcomes (in whatever capacity) they would have hauled us over the coals imposed all sorts of reviews etc etc etc to ensure outcomes improved. It is a truly pathetic reflection on the regulators ability to be the “consumer champion” that they have self proclaimed themselves to be.
    They will be unlikely to change their stance on this due to the delay it will create a delay in people getting their money from their pension and this will led to public outcry. Look at the number of complaints being logged with the FOS about delays to the freedoms and this is only a tiny part of the pensions industry. They will not put themselves in the public firing line for being seen to be they bad guy to those they are supposedly trying to protect.

  7. The FCA also want protection for customers with guarantees, and prevent providers from encouraging customers to take funds away from policies which would be expensive for the provider to support. Making OM the default would expose these customers to potential detriment. There’s no simple “one size fits all” solution here.

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