The latest data bulletin issued by the Financial Conduct Authority (FCA) has some interesting insights into how people are accessing their pension pots.
The purchase of annuities (buying a fixed income for life) fell by a significant 21% in the six months between October 2016 and March 2017, while those opting for drawdown grew by 4%. During that period 83,687 drawdown polices were purchased against 33,561 annuities, a ratio of nearly 3:1.
There was also an overall fall in the number of full cash withdrawals over the same period. However, they are still the most used method by consumers to access small pension pots accounting for 54% of all pots accessed and 86% of pots less than £10,000. Drawdown was the product of choice for 81% of those with pension pots worth £250,000 or more.
The FCA also found that over two-thirds (69%) of customers going into drawdown sought financial advice against 34% of those purchasing an annuity.
The FCA bulletin confirms that this data follows a similar trend to when new pension freedoms were introduced in April 2015, with drawdown proving an increasingly popular option as enthusiasm for a lifetime fixed income has waned mostly due to continuing low interest rates.
In an earlier study published in July 2017, the FCA identified five issues that require attention.
- More than half (52%) of fully withdrawn pots were not spent but were moved into other savings or investments. Some of this is due to a lack of public trust in pensions. This can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits.
- Consumers who access their pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around.
- Consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5% of drawdown was bought without advice compared to 30% now. Drawdown is complex and these consumers may need more support and protection.
- Providers are continuing to withdraw from the open annuity market which could bring a risk of weakened competition over time.
- Product innovation has been limited to date, particularly for the mass market.
There are clear dangers for the consumer in these findings. Every individual is different and there is no ‘one size fits all’ for planning a secure financial future, but it is all too easy to choose the wrong pension option without taking professional advice.