Annuity figures show UK retirees "starting to use new freedoms", says ABI

Out-Law News | 16 Sep 2014 | 11:23 am | 2 min. read

New annuity sales fell by over one third in the three months following the announcement of changes to the pension saving regime that would give savers more freedom over the way in which they access their pension pots, according to insurers.

Members of the Association of British Insurers (ABI) also reported that those with smaller pension pots were now more likely to take their savings as a cash lump sum, following the increased limits announced alongside more fundamental reforms as part of this year's Budget.

"This ABI data provides a useful analysis of the immediate choices customers have made following the Budget," said the ABI's Yvonne Braun. "It suggests customers with smaller pots have immediately started to use the new freedoms to take their cash lump sum, which is something the industry has campaigned for. The data also shows where customers with small pots choose to annuitise they are increasingly taking enhanced annuities."

"Although it is too early to determine how customer behaviour will continue to evolve between now and when the Budget reforms come fully into effect in April 2015, there are still a significant number of savers who will want the regular income provided by an annuity. We would expect that many will choose to annuitise later as a result of the new measures," she said.

An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into a regular pension income for the remainder of the policyholder's life. According to the ABI's figures (5-page / 280KB PDF), 46,368 of the policies were sold between April and June, down from 74,270 over the first three months of this year. The proportion of those sales that were 'enhanced' because of the customer's particular health or lifestyle factors remained the same, but was still higher than it was a year ago.

Sales fell more dramatically, by 42%, when compared to the same period one year ago, the ABI said, noting that the trend began before the chancellor's March announcements. In its last update, published in February, the ABI noted the effect of falling annuity rates since the financial crisis on sales.

Last week, Investment Life and Pensions Moneyfacts reported that annuity rates experienced their biggest monthly fall in three years last month, falling by 2.6%. Richard Eagling, head of pensions at the data provider said that the fall reflected "a significant reduction in gilt yields combined with falling demand".

The new pensions regime is due to come into force in April 2015 and will give members of defined contribution (DC) pension schemes more flexibility to access their savings as they choose without necessarily having to purchase an annuity or facing punitive tax rates. Once in force, the new regime will continue to allow savers to take up to a quarter of the value of their pension pot tax free on retirement, with any additional lump sum or pension taxed at their normal marginal tax rate. They would then be able to keep their pension invested and access the balance over time. These new flexibilities will be backed by a right to free independent guidance at the point of retirement.

DC pension scheme members can already take advantage of increased flexibility which came into force after the Budget. The minimum requirement for accessing flexible drawdown was cut, where scheme rules permitted, from £20,000 to £12,000, while the capped drawdown limit was increased from 120% to 150%. The size of the lump sum that can be taken from small individual pots, regardless of total pension savings, has been increased to £10,000 and the maximum that can be taken as a lump sum has been increased to £30,000.