Sales of annuities are plunging as retirement savers delay making pension decisions pending next year’s wholesale reform of the market.
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The number of annuities bought by retirement savers dropped by 56% in the third quarter of 2014 compared to the same period last year.
Not only did the number of annuities sold fall, but the rate the market is collapsing is accelerating.
In the second quarter, annuity sales decreased by 48% compared with the same quarter 12 months earlier, according to data released by pension provider trade body the association of British Insurers (ABI).
While annuities are on a downward spiral, the number of pension savers opting for drawdown was up 123% in the quarter compared to year-on-year sales, gearing up from a 73% year-on-year increase in the previous quarter.
Drawdown hits new high
The ABI confirms drawdown cases are at their highest level ever.
In a clear signal to the market that pension investors supports government proposals to give them easy access to their retirement savings, many annuity providers are having to rethink their products and business models as the bottom drops pout of the market.
One factor the ABI believes is keeping the annuity market afloat is that a large number of the sales are attributed to retirement savers with guaranteed above market rates included in their contracts dating back to the 70s and 80s.
This reflected by more pension providers making annuity sakes to existing customers than to the open market, explained the ABI.
Meanwhile, the statistics also show pension savers with smaller pots are buying into annuities.
Pension fund size shrinks
The average pension pot size for a drawdown customer was £63,100 in the third quarter of 2014 – 24% down on the third quarter figure of £83,400 of a year ago and 11% down on the second quarter of 2014 amount of £70,400.
However, fund sizes for annuity customers were up 13% year on year to £36,600, but just over 5% from a pot size of £38,600 in the second quarter of 2014.
Rob Yuille, a policy adviser at the ABI said: “Anticipation of the government’s reforms to give more flexible pensions is continuing to influence people’s decisions about what to do with their pension funds.
“Many are holding off a decision waiting from the new rules to kick on from April 6 next year while companies are analysing the trends to work out what to do next.”
Legal & General chief executive Nigel Wilson has forecast annuity sales could slump by up to 90%. The market shake up triggered by flexible pension rules has already seen has already seen financial firm Aviva agree to buy rival Friends Life for £5.6 billion as the latter struggles to overcome falling sales of annuities.
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