Sales of annuities continue to plummet on the back of upcoming pension freedom

24th November 2014

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Annuity sales more than halved, from just over £3bn to £1.46bn, in the three months to the end of September compared to the same period last year according to the latest data from the Association of British Insurers.

Sales of annuities, which provide pensioners with an income for life in exchange for their nest-egg, have fallen 56% compared to the third quarter in 2013, down from around 90,000 per quarter to 40,085.

Meanwhile, income drawdown sales, have shot up, from 5,476 in the third quarter in 2013, to 12,212 over the same period this year.

By opting for income drawdown, instead of an annuity, pensioners can still stay partially invested, given them the chance to draw an income while their pot still hopefully grows.

But perhaps not surprisingly, the average drawdown case size has fallen, from £83,400 to £63,100. The overall value of the drawdown market increased from £457m in the third quarter 2013 to £770m over the same period this year.

Meanwhile, providing further evidence of the failure of the Open Market Option, the proportion of internally sold annuities compared to those bought on the open market, has increased from around 50/50 to 65%/35% in favour of the internal annuity sales and at the same time the proportion of enhanced annuities has fallen from 28% to 22%.

Commenting on the sales figures,Tom McPhail, head of pensions research at Hargreaves Lansdown said: “Whilst there is clearly still strong residual demand for annuities, it appears to be coming primarily from the captive internal customers of insurance companies, rather than from those who are shopping around the market place.

“This highlights the need to ensure that every investor is able to shop around the market for the best solution for their personal needs, irrespective of whether they want to buy an annuity, or drawdown or a combination of the two.”

Given that demand for drawdown has increased significantly, McPhail expects this trend to continue after next April, however he highlighted that it is also notable that drawdown sales have not picked up all the slack from the drop off of the annuity market.

He added: “There appears to be a building population of investors waiting until after April, something borne out by previous research from Hargreaves Lansdown. This reinforces the expectation that we may see very substantial volumes of demand in the weeks and months after the 6 April 2015. We do have concerns that some pension providers may not be ready to meet their members’ and policyholders’ expectations.”

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