Progress may be slow in the pensions world but consider this: the open market option introduced in 1975 is beginning to live up to expectations.
The recent milestone figures from the Association of British Insurers show annuity sales rose to £5.2bn in 2023, the highest since the pension freedom and choice reforms of 2015.
The question I look to answer whenever I see the new data presented is whether buyers are squeezing all the value they can out of their pension pots by using their (OMO) right to shop around for the best deal.
The data shows a significant improvement on the past. In the final quarter of 2023, £75 of every £100 of pension savings used to purchase a guaranteed income for life was invested by retirees who chose to purchase their annuity from a different company to the one they used to build up their pension pot.
This high figure represents a transformation in consumer behaviour (and the great work done by advisers). For years, inertia and information asymmetry resulted in many retirees never knowing more competitive annuities were available or being discouraged from shopping around.
A Financial Conduct Authority study in 2014 reported that 60 per cent of savers purchased an annuity from their own pension provider despite the fact 80 per cent could get a better deal on the open market.
It responded to this obvious harm to so many people with a range of positive interventions, most notably obligatory information prompts detailing the provider’s own annuity quote and how much more the retiree could receive by going elsewhere.
Along with other measures such as improved ‘wake up’ packs and better signposting to sources of guidance, these interventions are bearing fruit.
It goes to show that well-designed regulation can make a difference to improve consumer outcomes, particularly in annuity cases where poor initial decisions can never be undone while good choices keep delivering for a lifetime.
Advisers, paraplanners and brokers have a lot to be proud of too. It was professional advisers that started the revolution many years ago by using technology to shop around the market to ensure their clients secured the best guaranteed income for life.
And the real breakthrough came with advisers asking questions about their clients’ medical conditions and lifestyle in order to secure the very best deals.
The importance of personalisation, of truly knowing the client’s unique situation, has become more firmly enshrined in regulation through rules such as the consumer duty. But good advisers have put knowing your customer at the heart of their propositions for many years.
Looking ahead
So where do we go from here? We are nearly 10 years on from the first announcement of pension freedom and choice, and annuities (out of favour during the ultra-low interest rate years) are coming back into focus, as the ABI figures show.
The old problem of making a finite amount of money last a lifetime, however many decades that may be, has not gone away.
Most people have regular bills to pay and could benefit from at least their basic needs being covered by secure income, so they never have to worry about running short.
An obvious point from today’s figures is that although shopping around has increased to record levels, still too many people are missing out and too many are not receiving enhanced rates.
The amount of pension that buyers spend on their annuities is now far higher than before pension freedoms – the average premium is around £80,000. But even those with smaller pots need it to generate the most cash they can.
Pension freedom and choice was a massive change that has resulted in both winners and losers.The ABI reported a 66 per cent rise in sales of enhanced annuities, but it remains less than half of the market by premium, pointing to more money being left on the table.
The fly in the ointment is that the ABI reported only 29 per cent of annuity buyers are using professional advice.
We also know that take-up of Pension Wise, the free, independent and impartial guidance service, could be greater too.
This low figure remains a real worry considering the amounts of money involved, the complexity of the decisions being made, and the real probability of harmful outcomes that only manifest themselves over many years or decades.
One final thought: it is good to have some actual figures to work from. Pension freedom and choice was a massive change that, in other countries that have adopted similar approaches, has resulted in both winners and losers.
Nearly a decade into the experiment, it would be good to know how it’s shaping up and check we are not heading for a bumpy landing.
Stephen Lowe is group communications director at Just Group