The introduction of pension freedoms in April 2015 has seen the purchase of smaller annuities collapse, with increasing numbers of people opting to invest in other vehicles (such as drawdown plans) or, more worryingly, the stock market.
The performance of financial markets in 2018 shows how perilous it can be to invest in the stock market, especially for those with smaller pension pots who have less of a safety net should wealth dry up.
Steve Wilkie, managing director of Responsible Life, said: “This is a wake-up call for the government. Sales of annuities have gone off in vastly different directions at either end of the spectrum.
“It is only a matter of time before a great many poorer pensioners who abandoned annuities in favour of riskier bets on the stock market come unstuck.
“Many retirees will be launching themselves headfirst into financial difficulty because they took a risk with what little they had.”
Shocking annuity sale
Under current rules, defined benefit (DB) pension pots below £30,000 ($38,272, €33,436) do not require financial advice before transferring, meaning that retirees may not be aware of the potential pitfalls of cashing out instead of buying an annuity that offers a guaranteed income – albeit a small one.
This ‘awareness gap’ is potentially reflected in the sharp drop in the number of annuities with a value between £10,000 and £50,000 bought in the last couple of years.
In the six months to March 2018, sales of annuities worth between £10,000 and £30,000 were down 26.8% to 9,143 compared with the same period to March 2016, the latest Financial Conduct Authority data shows.
Those between £30,000 and £50,000, which do require advice, had plummeted by 27.7% to 6,243.
In contrast, sales of annuities worth significantly more have risen.
There was a 7.3% increase in annuity sales between £100,000-£250,000 during the two years to March 2018, while those worth more than £250,000 rose sharply by 45.9%.