Pension warning over annuities plunge that spells disaster for retirement

A sharp fall in sales of annuities, which allow retirees to use their pension pot to buy an income for life, has been revealed.

The total number of sales dropped almost 14 percent from to 59,163 in the 2022-23 financial year, according to figures from the Financial Conduct Authority (FCA).

Investment experts said the fall came despite the fact that the amount of income that could be purchased through an annuity was relatively strong.

Instead of buying an annuity many pensioners decided to keep their pension pot intact and draw down an income from it.

Many people see drawdown as giving them greater flexibility and control over their finances, however it risks them running out of cash over the long term.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Annuity sales dropped in 2022/23 according to the latest FCA data. In a period that covered incomes soaring to historic highs it looks like retirees wavered in their decision making, perhaps waiting to see if rates could go higher still.”

She suggested that many people subsequently took a decision to buy an annuity and this is likely to show up in future figures.

Miss Morrissey added: “Income drawdown remains a popular choice among retirees with 218,000 pension pots entering SIPP drawdown - this compares to just over 59,000 annuities.

“However, it looks like withdrawal rates remain on the high side – around 40 percent of plans had withdrawal rates of over 8 percent per year. This is far higher than historical rules of thumb which lie somewhere closer to 4 percent.

“Larger withdrawals might be fine for one off events like paying for a wedding or home renovations but if this continues long-term this could leave people at severe risk of running out of money.”

Tom Selby, director of public policy at investment experts AJ Bell, said: “Given the substantial improvements in annuity rates we have seen in the last few years, you might have expected this latest FCA data dump to show a continuation of the surge in sales reported in 2021/22.

“In fact, annuity sales slumped 14 percent in 2022/23 as savers continued to choose retirement income flexibility and choice over a guaranteed income for life.

“Drawdown, by contrast, remains comfortably the most popular retirement income option in the UK, with over 218,000 new drawdown policies entered into in 2022/23, a 6 percent increase versus the prior year.”

He sounded a warning on the rise of drawdown, adding: “These are figures that will inevitably raise some concern among policymakers and are likely, in part, a reflection of the difficult economic circumstances millions of retirees and their families found themselves in as spiralling inflation pressured people’s budgets.”

Mr Selby added: “The key to making drawdown work is to carefully consider the sustainability of your withdrawal plan, understand and be comfortable with the risks you are taking, and review your strategy regularly, ideally with a regulated adviser.

“If your investments hit the skids, particularly in the early years of retirement, you might need to tighten your belt to keep your withdrawals on a sustainable path.

“Similarly, if your investments deliver large returns then you might be able to withdraw a bit more. But for drawdown to work, you need to stay engaged – sticking your head in the sand and hoping for the best is not an option.”