Annuities - a choice for the future?

David McDonald, Propositions Manager for Guidance, discusses the latest EV research that shows annuities are a popular choice amongst consumers planning for their retirement.

Recent data published by the FCA showed that annuity purchases continue to be an unpopular choice for retirees' plans - but are those further off their retirement looking at it more favourably?

Since 2015, with the introduction of Pension Freedoms, EV has been recording and analysing consumers' choices in the EVDirect Retirement Options tool. 

Retirement Options presents users with a personalised choice between annuity, drawdown and lump sum; based on their forecasted position at retirement. Users then select which of the three options they would like to explore in more detail before receiving further education and the ability to build a detailed retirement plan.

Annuities have been a stable and popular choice for the past seven years, averaging almost 53%. However, the drawdown has remained in second place, averaging 35%, and the lump sum is firmly in last at 12% - see the graph below for a year-on-year breakdown.


EV Retirement Options data 2016-2022

Source, EV as of November 2022.


Is it a generational thing?

Could this suggest that Gen X and the younger generations are now moving to consider a secure income? The data certainly means so. Looking specifically at the choices within individual generations, annuities grow in popularity by almost 10% from Baby Boomers to Gen Z - a very consistent trend.

With people anticipating living longer in retirement, a guaranteed income will certainly appeal - especially with annuity rates reaching highs not seen since 2008. In addition, the ever-increasing cost of living, a particularly popular topic for household discussion, will likely lead to consumers wanting some element of protection from inflation. This could be the main cause of a final peak on the annuity option in 2021/22.

Are lump sums fading into dust?

The steady decline in the lump sum option is an interesting observation. It isn’t unreasonable to expect consumers with small pots to withdraw their entire savings to assist where possible. Most of EVDirect’s user base will be low net wealth. Perhaps the opposite has happened; consumers realise the value of having assets supporting their essential living rather than using their pensions for desirable spending.

It was certainly a concern that the government had when the Pension Freedoms was first introduced; what would happen to pensioners who withdraw their entire pension savings to splurge on a Ferrari or cruise around the world? Thankfully the “mass pension withdrawal” never occurred, but the current economy seems to be driving consumers away from uncertainty and splurge-spending.


Closing comments

When it comes down to it, will consumers be willing to receive less in retirement in exchange for protection from their pots exhausting?

Whilst these consumer trends aren’t guaranteed to be a true reflection of which choice they will select at retirement. However, it makes for interesting reading about the clear change in attitude towards annuity by generation. 


So what next?

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