Recent research shows DC members are exercising their retirement income flexibilities but many are doing so without advice. Helen Morrissey takes a look
- The Future Book shows the amount of people seeking regulated financial advice for income drawdown and annuity purchase fell in 2015
- At the moment many retirees will have a defined benefit buffer but as time goes on fewer retirees will have this
- More work needs to be done on developing appropriate advice channels
The introduction of Freedom and Choice heralded a massive shift in how defined contribution (DC) members access their pensions. According to the Association of British Insurers in 2012, more than 90% of DC assets were used to purchase an annuity. However, recent research from the Pensions Policy Institute (PPI) shows this has shifted markedly.
The Future Book, supported by Columbia Threadneedle, shows that annuity sales declined rapidly after the introduction of Freedom and Choice, but have recently levelled out at around 20,000 per quarter. In 2015 just 6% of those accessing DC savings used it to buy an annuity.
In contrast, sales of income drawdown have grown massively. Between 2010 and 2014 there were around 20,000 new contracts per year. This doubled to almost 40,000 new contracts in 2014 and in 2015 there were over 75,000.
Lump sum payments also increased. Between April 2015 and March 2016 over 300,000 DC savers withdrew lump sums, which amounted to a value of £4.3bn. While activity was high in the immediate aftermath of the reforms, there are signs that it has since settled. In Q1 2016 there were 87,000 withdrawals worth a total of £750m.
While it is interesting to see that DC members are exercising their choices, the research also shows the number of people accessing regulated advice to purchase annuity and drawdown products fell in 2015.
According to the figures, non-advised drawdown sales grew from 9% to 15% between 2014 and 2015.
While independent advice was sought in 81% of drawdown sales in 2014, this had fallen to just 69% in 2015. However, more income drawdown customers chose to go down the restricted advice route with 16% of sales being generated this way as opposed to 10% in 2014.
On the annuity side, non-advised annuity sales grew from 70% in 2014 to 74% in 2015. One fifth (20%) of annuity sales came through the independent advice route in 2015. This was down from 22% in 2014. Only 6% of annuity sales came through the restricted advice route in 2015. Again, this was down from 7% in 2014.
The findings have prompted concern that without appropriate support and knowledge of potential risks then people risk making sub-optimal decisions.
"The second edition of the Future Book confirms that following the new Freedom and Choice reforms, people are accessing DC savings in riskier ways," says PPI head of policy research Daniela Silcock. "More people are taking their DC pension savings through lump sum withdrawals than through annuities or drawdown, both of which offer some in-built protections. On top of this, fewer of those who are purchasing annuity and drawdown products are using independent advice; and interest in transferring pension savings from safer defined benefit (DB) pensions into DC schemes has more than doubled."
She continued: "While for some people, with very small pots, this behaviour may not carry much risk, those who are very dependent on their DC savings could end up with a lower income in retirement if they make choices unsuited to their circumstances."
Speaking at the launch event, PPI director Chris Curry said it was unclear why DC members were shunning advice but said more work needed to be done to develop alternative advice channels.
"There is definitely a need for more advice since the advent of Freedom and Choice but the question is how it can be delivered effectively," he said. "Do we need to look more closely at developing different advice channels like robo-advice, for instance?"
The Pensions Advisory Service (TPAS) chief executive Michelle Cracknell agreed, saying that the industry "cannot deny the growing need for more self-service options". She also pointed to the fact that currently many people retiring will have a DB buffer that to some extent will protect them if they make poor decisions about how to access their DC pot. However, as time goes on we will see retirees become more reliant on their DC pot and so the need to make the best possible decisions becomes ever greater.
"At the moment we aren't seeing a lot of people taking regular income from a DC pot, but believe me, we are getting to a point where this will change," she said. "By 2050, DC will be a critical part of many people's retirement saving."
So, while it is good to see that people are engaging with the Freedom and Choice reforms, it is worrying that so many are choosing to do so without adequate support.
There may be many reasons for this such as over confidence, lack of awareness or an unwillingness to pay but it is a trend that will need to be reversed if people are to get the most out of their retirement income.
As awareness of services such as Pensions wise and TPAS continues to grow, it is to be hoped this trend will dissipate but developing appropriate advice channels must continue to be a major area of development for the industry going forward.
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