FCA data raises annuity shopping around concerns

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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.