Experts say large numbers are delaying decisions about their savings pot until new rules come into force, writes Jeff Salway
PENSION savers may be putting their retirement finances in jeopardy by deferring decisions until new pension “freedoms” take effect, experts say.
The warning came after a fresh plunge in the sale of annuities, which pay a guaranteed income throughout retirement, suggested that large numbers of people will be taking more risk with their pension pots under the new rules.
The changes will allow pension savers aged 55 or over to take their entire pension as a cash lump sum, including 25 per cent tax-free. The remainder will be taxed at the saver’s marginal rate, rather than the current 55 per cent charge.
Just one in four people polled by BlackRock said they would still buy an annuity under the new rules, while 28 per cent were not sure what they would do. Another 17 per cent said they’d withdraw all their pension and invest it elsewhere. Of those, 9 per cent plan to invest it for an income and 8 per cent will put it in a cash account, despite rock-bottom savings rates.
But another study, by the International Longevity Centre, found that seven out of ten over-55s want their pension to provide a guaranteed income for life – which only annuities can provide.
Demand for annuities has fallen sharply since the shake-up was set out in the 2014 Budget. Sales were down by 30 per cent last year, according to new research by Iress, which found that demand plunged at the end of the year as more people held off making pension decisions.
Dave Miller, of Iress, said: “It’s clear that many consumers are adopting a ‘wait-and-see’ approach and delaying making decisions around their retirement income, opting to draw down, or are waiting to cash out more of their savings.”
The popularity of annuities has also been hit by a recent fall in payouts as providers have reacted to lower demand and falling gilt yields by cutting their rates.
The average annual income for a 65-year-old buying a standard level annuity with a £10,000 pension pot fell by 5.7 per cent last year, new Moneyfacts figures show.
Richard Eagling, head of pensions at Moneyfacts, said: “The ability of providers to withstand the downward pressure on annuity rates being exerted by lower gilt yields has been curtailed by the reduced demand for annuities since the 2014 Budget, which shows no signs of abating.”
Yet annuities bought on the open market are better value than drawdown for risk-averse savers with average-sized pension pots, according to the Financial Conduct Authority (FCA). Six in ten annuity buyers fail to shop around for their annuity, however, with the vast majority getting an inferior income as a result.
The best rate for a standard single life annuity averaged 5.65 per cent in 2014, said Iress, compared with an average worst rate of 4.93 per cent. Someone retiring with an average-sized pension and settling for the latter rate would be £11,000 worse off over a 25-year retirement than if they had secured the best rate.
People with medical conditions or certain lifestyle characteristics (such as smoking) particularly benefit from shopping around, as they may qualify for an enhanced annuity that pays out a higher income. Just 5 per cent of those who buy an annuity from their existing pension provider take an enhanced annuity, compared with 50 per cent of people who shop around.
“People should not ignore annuities,” said Sandy Robertson, managing director at Acumen Financial Planning in Edinburgh. “Advisers will consider annuities as one of the options available to retirees, but it is becoming an option easily discounted if people want their children, for example, to inherit their unused pension pot when they die.”
On the other hand, said Robertson, an annuity may well be ideal for a single person with no dependants, good health and absolutely no interest in financial matters.
“Advisers will generally do the right thing by clients – not so unregulated sales organisations approaching the unwary with only one object in mind: taking advantage,” he added.
But many retirees are rejecting annuities in favour of drawdown – where their pension remains invested and they can take income from it in slices – or waiting until they can take their pension as cash.
But some may have to wait a while, as company pension schemes are not legally obliged to give members unlimited access to their savings.
Just 5 per cent of workplace pension schemes will let savers take their pensions as cash from April, while just 2 per cent will offer full drawdown flexibility, research by consultants Xafinity found.
More than half of schemes admit they haven’t decided whether to let members take advantage of the new pension freedoms from the outset.
Paul Darlow, head of proposition development at Xafinity, said: “This leaves millions of people near to retirement with considerable uncertainty.
“They have the choice between delaying their retirement, retiring in their existing scheme and missing out on these new flexibilities or moving their benefits into a new pension scheme in which there may be significant costs or charges.”