FCA data reveals shock fall in annuity sales as drawdown remains retirees’ top choice

• The total number of pension pots accessed for the first time increased by around 5% in 2022/23, from 705,611 to 739,535, new FCA data reveals (Retirement income market interactive analysis 2022/23 | FCA)
• This comes after an 18% spike in the number of pots accessed for the first time in 2021/22
• Drawdown remains by far the most common retirement income route for Brits, with 218,074 new drawdown policies entered into in 2022/23, a 6% increase year-on-year
• By contrast, annuity sales dropped almost 14% over the same period, from 68,514 to 59,163, despite improvements in rates driven by rising gilt yields
• Full cash withdrawals, meanwhile, increased by around 6%, from 395,235 to 420,727, with the ongoing cost-of-living crisis inevitably a factor
• However, the vast majority of those full withdrawals (377,193 or around 90%) were of pension pots worth less than £30,000

Tom Selby, director of public policy at AJ Bell, comments:

"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% 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% increase versus the prior year.

"By far the most common withdrawal rate in drawdown was 8%+, with over 191,000 people taking withdrawals of this size from their hard-earned retirement pot. The number of full encashments, meanwhile, rose by around 6% to over 420,000.

"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.

"Context is key here, however, with the vast majority of full pot withdrawals involving relatively small funds worth less than £30,000. Furthermore, while on the face of it a withdrawal rate of 8%+ might look eye wateringly high, the sustainability of a drawdown strategy will depend on the circumstances of the individual, including their health, age, income sources and investment returns.

"For example, someone who has a guaranteed defined benefit (DB) pension that covers all their living costs might be perfectly comfortable taking large withdrawals from their SIPP.

"Equally, someone who is accessing their pension later in life - for example in their mid-70s - should be able to withdraw a higher amount sustainably than someone who starts taking an income from their 60^thbirthday."

Sensible withdrawal strategy key for drawdown

"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.

"As a very rough guide, experts usually say a healthy 66-year-old can safely withdraw between 3-4% of the value of their fund each year and be confident it will last throughout their retirement. But what is sustainable will vary from person to person, depending on their individual circumstances."

Tax consequences

"You should also carefully consider the tax impacts of the drawdown decisions you make. Taking a large withdrawal from your pension could result in you being hit with an unnecessary tax bill that could be avoided by steadily drip-feeding withdrawals. The risk of being dragged into higher tax bands has been increased by the government's deep freeze of income tax thresholds.

"Furthermore, accessing taxable income from your pension flexibly will trigger the 'money purchase annual allowance', lowering your annual allowance from £60,000 to £10,000 and revoking your ability to 'carry forward' up to three years' unused allowances from the three previous tax years.

"One final major tax consideration for many people is passing money onto loved ones. Pensions are extremely tax efficient in this regard and, if you die before age 75, can be passed on completely tax-free to your nominated beneficiaries. If you die after age 75, meanwhile, any money bequeathed will be taxed in the same way as income. This means in lots of circumstances, from an inheritance tax perspective, it can make sense for your retirement pot to be the last asset you touch."