Annuity purchasers regret decision as confusion 'remains rife'

Two years have passed since the government introduced greater flexibility for retirement savers, giving people far more choice when it comes to retirement, with new figures from HM Revenue & Customs showing £6.45bn was withdrawn by 393,000 individuals over the year to March.

A longitudinal study conducted by mastertrust The People’s Pension and investment manager State Street Global Advisors has explored consumer behaviours under freedom and choice by following a group of people who intended to take money from their DC pot from June 2015 to February 2016. Thirty people took part in this final part of the study.

Content yet confused

The latest report, published in April, looks at what the participants think of the choices they have made, one year on, showing that 19 out of 30 people who had accessed part or all of their pension during the first part of the study were either “happy” or “very happy” with the decisions they had made.

For example, those who had chosen to cash in all their pension money were happy to have the funds in their control, in spite of paying higher-rate tax. Elsewhere, people who had chosen partial encashment by taking their 25 per cent tax-free cash “have no regrets” and expressed satisfaction at having been able to spend the money now on home improvements, holidays and family.

Source: Ignition House

However, “indecision and confusion remains rife”, with many people simply taking a chance and hoping everything will turn out for the best, according to the research.

One respondent, who had chosen tax-free cash and zero-income drawdown, said: “I don’t really know what I am in. I thought it was going to be another kind of pension. I don’t really understand it. I think I can draw another lump sum, I am not sure… I am confused.com.”

Annuity regrets

While many were content with the decision they had made, the study found annuity purchasers are “the most likely to have some initial regrets, questioning whether they should have taken advice or could have received more money if they had waited longer, or whether the inflexibility of the annuity is really the right thing for them given that circumstances can change quite rapidly”.

It notes: “In the back of their mind is a niggling disappointment with current annuity rates, and the thought that rates might get better in the future.”

Janette Weir, director at research consultancy Ignition House, which prepared the study, said: “The problem with the annuity is the inflexibility of the decision”.

However, the fact that one's retirement is “done and dusted” once an annuity has been purchased can be attractive for some people because “they don’t have to think about it anymore”, Weir noted.

Alistair Byrne, head of DC investment strategy at State Street Global Advisers, said that referring to the decision as a secure income “has a certain appeal to it” for savers, who may be put off by the word "annuity".

Some people have a negative view of annuities because they may not really understand the concept of insurance, according to Darren Philp, head of policy and market engagement at The People’s Pension. 

He said annuities have been given a bad name because they “haven’t been necessarily correctly sold in the past”. In addition, a lot of shopping around is involved, and “you’ve only got one attempt to get it right”.

Kate Smith, head of pensions at provider Aegon, said people's regrets over choosing an annuity were to be expected.

“I’m not surprised that people regret it, because they now understand that there's much more flexibility out there, and they think maybe that would have suited [their] circumstances better," she said.

Given that the proposals for a secondary annuity market were scrapped last year, “they’ve got that annuity for the rest of their lives, whether they want it or not”, she said.

Living for the here and now

The fact that the study showed most people have no regrets “is a really powerful conclusion, but to my mind that reflects that people live for the here and now and are not necessarily thinking longer term”, said Philp. "I think only time will tell whether people have made the right decisions," he added.

He noted that the study shows “there’s lots of confusion out there”, given that people need to shop around, and "expecting people to be really engaged is never going to lead to great outcomes".

He said the industry and the government need to think about products that provide "a really strong default in the at-retirement phase as well as in the saving phase".

Ultimately, "I think we're going to see quite a lot of [industry] innovation and quite a lot of products" becoming available, he added. 

When it comes to people being confused about the flexibilites, Aegon's Smith said financial advisers could alleviate the problem: "This is where advice is absolutely key.”