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UK pension holders waiting to purchase annuities, according to ABI figures

Out-Law News | 20 Feb 2014 | 1:17 pm | 1 min. read

UK insurers have reported an increasing number of pension policyholders deferring purchase of an annuity as rates remain low, according to the Association of British Insurers (ABI).

New figures from the industry body (4-page / 333KB PDF) showed that 16% fewer annuities were sold in 2013 compared to the previous year. At the same time the ABI said that the number of policyholders using income drawdown to withdraw money directly from their pension pot, rather than converting all or part of it into an annuity, was increasing by around 21,000 annually.

The new figures coincide with the announcement of a competition market study of annuities providers by new regulator the Financial Conduct Authority (FCA). When it published the results of a thematic review of the market at the end of last week, the FCA said that it was concerned that few savers shopped around for a better deal despite research showing that 80% of those who bought an annuity from their existing pension provider could have obtained a more generous retirement income if they bought an annuity from a different provider.

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. Around 353,000 of the policies were sold by ABI members in 2013, worth £11.9 billion.

Although the overall average size of a pension pot used to purchase an annuity continues to grow according to the ABI, 29% of the policies are purchased with a pot of less than £10,000. Those with smaller pots were less likely to shop around for the best deal when cashing in their pension pot, with the ABI noting that only 46% of those with a pot of less than £10,000 said that they shopped around compared to 63% of the total. The FCA highlighted lack of choice for those with less than £5,000 saved for a retirement as a particular concern in its market study.

The ABI said that more of those with the smallest pension pots were now buying enhanced annuities, which are medically underwritten policies that take into account underlying health conditions or lifestyle factors that affect life expectancy. The proportion of these policies sold continues to rise, and stood at 28% by the end of 2013, according to the ABI's figures.

According to the figures, the mean average annuity purchased in 2013 was bought with a pension fund of £35,600. However, the median average was around £20,000, meaning half of those purchasing an annuity did so with a pension pot worth £20,000 or less.