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Annuities, drawdown and lump sums – 5 things we learned 10 years on from pension freedoms

In the decade since the Freedom and Choice reforms, the pension market is drastically different. Here are five things we’ve learned.
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Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

It’s been 10 years since then Chancellor George Osborne’s Freedom and Choice reforms turned the retirement market upside down.

Under these changes, people had unparalleled flexibility in choosing their retirement income. There wasn’t an effective compulsion to buy an annuity anymore, so more people could go into income drawdown or even take their pension as a cash lump sum.

In the days after, speculation ran rife – the annuity market was dead and people were going to cash in their pensions and buy Lamborghinis.

The reality is that none of this happened. People have been far more sensible than they were given credit for, making full use of the flexibilities made available.

Here are the key things we’ve learned.

This article isn't personal advice. If you're not sure what to do with your pension, you should seek guidance from Pension Wise, the government’s free impartial service to help you understand your retirement options. If you need more help, think about financial advice.

Pension and tax rules can change, and any benefits depend on your circumstances. You can only usually access money in a pension from age 55 (rising to 57 in 2028).


Annuities didn’t die, but the market changed

Pre-pension freedoms, annuities were the premier retirement income choice – 420,000 were sold in 2012. By 2021/22, it was just 68,514.

But rumours of a market collapse were greatly exaggerated, and right now annuities are enjoying something of a renaissance – incomes have soared off the back of higher interest rates.

In fact, 2023 was the biggest year for annuity sales since before the reforms.


Income drawdown became a force to be reckoned with

Once dwarfed by the annuity market, income drawdown has since soared in popularity. The latest Financial Conduct Authority (FCA) data is showing over 205,000 drawdown policies were entered into in 2021/22.

So, it’s not just for ‘wealthier’ retirees anymore and people can use it on its own or alongside annuities to build a resilient retirement income.


We do need more help though

Making sure you don’t run out of money needs careful long-term planning. However, FCA data is showing in 2021/22 almost 70,000 pots put into income drawdown without people taking any advice or guidance.

The FCA’s investment pathways initiatives do offer investment options for people unsure where to invest, but over time people might find they need more support.

Additionally, the same data shows there were over 160,000 plans where withdrawal rates were over 8%. There might be times when you need to take more money, but if it continues over the long term there’s a much bigger chance you’ll run out of money.


We didn’t spend all our money

The talked about ‘dash for cash’ didn’t happen with the data showing we’ve been much more sensible.

Pension flexibility data tends to show the numbers accessing their pensions grows, but the average withdrawal amount is relatively stable.

There’s evidence of people taking their pensions as a cash lump sum, but this is overwhelmingly concentrated in the smaller pots. It could even be evidence of people accessing one pot as cash while having other pensions they’re drawing income from.


We paid more tax than we needed to, but did claim it back

A real unintended consequence of the reforms was the emergency tax rate applied to people’s first lump sum withdrawals.

This was because the amount withdrawn is treated as though it’ll keep being paid monthly instead of a one-off.

The excess tax will be repaid to you eventually, or you can put in a claim yourself. So far, HMRC has repaid £38,784,733 in excess tax.

The easiest way to make a claim is by visiting the government website (gov.uk).

Looking for retirement advice?

Retirement is a time when you might feel unsure about what to do with your money and need help to make decisions. Our financial advisers can work with you to:

  • Plan your personal budget and retirement income strategy

  • Make sure your investments match your goals

Give pension advice, including when and how to take them

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Written by
Helen Morrissey
Head of Retirement Analysis

Helen raises awareness of key retirement issues to help people build their resilience as they move towards their later life.

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Article history
Published: 25th March 2024