By Harvey Jones
Annuity sales collapsed after pension freedoms were launched in April last year as hundreds of thousands celebrated their liberation from the obligation to lock into a lifetime income at retirement.
Many either cashed in their lifetime savings or took an income drawdown plan, leaving their pension invested while drawing an income from it. While barely one in 10 pensioners took out drawdown before the reforms this quickly soared to more than half.
However, many failed to understand the risks. The stock market meltdown has now savaged the value of money held in drawdown, turning every £100,000 into just £86,522. That is a drop of 13.5 per cent in less than a year, according to new figures from Retirement Advantage.
This is the downside of pension freedom that many over-55s failed to appreciate at the time. Younger investors have time to overcome stock market shocks but those who have retired do not, especially if they have to withdraw income from their pension today.
At a time of market volatility the risks for retirees using drawdown are considerable
Bruce Moss, eValue,
Now new research from forecasting firm eValue shows savers are rushing back to the safe haven of annuities. The trend started last summer in the wake of August’s Black Monday stock market crash in China. While just 33 per cent of savers opted for an annuity when pension freedoms began last April, that has since jumped to 47 per cent.
At the same time the number opting for flexible income drawdown has fallen from 54 per cent to 42 per cent.
Bruce Moss, strategy director at eValue, said the popularity of annuities would continue to soar if current market uncertainty persists.
“At a time of market volatility the risks for retirees using drawdown are considerable.”
Moss said drawdown is particularly dangerous for those in the early years of retirement as they will further erode their pension by withdrawing income from their reduced pot. Damien Fahy, founder of personal finance website MoneyToTheMasses.com, said savers who chose drawdown have jumped out of the frying pan and into the fire.
Head ded : “Annuities appeared to offer such poor value that consumers flocked to drawdown without understanding the risks.”
The attraction of an annuity is that it guarantees you an income for life, no matter how long you live, whereas with income drawdown your pot could run dry. Fahy said that although annuity rates have fallen sharply since the financial crisis a 65-year-old could still get around four per cent a year, guaranteed for life.
“You will get even more if you are in poor health and qualify for an enhanced or impaired life annuity,” he added.
Fahy said that savers who have already signed up for income drawdown should sit tight and wait for stock markets to recover if they can. Stephen Lowe at pension advisers Just Retirement said those coming up to retirement who have a big enough pension should consider splitting it between an annuity and drawdown.
He said: “The annuity should cover essential spending and ensure that you don’t run out of money but you can still benefit from the flexibility of drawdown.”
Lowe said these are complicated decisions and you should seek independent financial advice or free guidance from PensionWise.gov.uk.