Nearly two-thirds of pension pots fully cashed in
Two years on from the launch of the pension freedoms, a new report by the Financial Conduct Authority shows what the changing retirement income market looked like in the third quarter of 2016.
The report analyses how people have accessed their pension funds over the last 12 months. Broadly speaking, the number of cash withdrawals (79,916) is twice as high as the number of drawdowns (41,067). And drawdowns in turn are twice as popular as annuities (20,538).
Over half a million pots were accessed for the first time between October 2015 and October 2016. Of those pots, the majority (296,673) were fully cashed in.
However, fewer than half (47%) of the people who withdrew their money as cash spoke to an adviser, although this figure has gone up significantly from 29% in the first quarter.
Further, around 65% of drawdown investors took advice, but only 33% of those purchasing annuities took advice.
Tom Selby, senior analyst at AJ Bell, comments: "After the inevitable spike following the introduction of the freedoms in April 2015, a new normal is beginning to emerge.
"Drawdown has replaced annuities as the default option for most savers, with roughly twice as many drawdown policies sold per quarter."
The report reveals that those opting for drawdown and annuities have been less likely to seek financial advice in comparison to previous quarters.
Only those who picked full withdrawal have sought advice at an increased rate of 47% compared to 41% in the previous period.
Selby argues that the drop-off in the proportion of people seeking advice on drawdown and annuities is potentially a cause for concern, given the complex nature of the retirement decisions they have to make.
The fall has been particularly stark in the annuity market, with just a third of people seeking advice before locking into a retirement income product for life in the third quarter 2016.
"However, without more detailed information on the circumstances of those cashing in their retirement pots - such as their overall wealth or the existence of other sources of income - it is impossible to draw any firm conclusions," he continues.
Andrew Tully, pensions technical director at Retirement Advantage, comments: "We need to think more radically, as the pension freedoms should not be licence for people to receive poor value from their retirement choices. The issue here is to help people get advice.
"There is a strong correlation between those people who do receive financial advice and the number of people who shop around. I think it's high time we had a debate about the merits of introducing a form of compulsion in shopping around."
This story was originally written for our sister magazine, Money Observer.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.