Until 2015, people with a Defined Contribution (DC) pension pot had three main options when it came to taking a pension. Those with the smallest pots could cash them out, whilst those with the largest pots could draw down on them gradually, provided they satisfied certain stringent conditions.
But for the vast majority of people there was really only one choice – to take their pension pot, access up to a quarter in the form of a tax-free lump sum, and use the rest to buy an income for life or an ‘annuity’.
Annuities were becoming unpopular for a number of reasons which was why in the 2014 Budget, Chancellor George Osborne announced the Pension Freedom reforms. This has made it much easier for people to access DC funds without buying an annuity. Since then the use of annuities at retirement has been in decline. But this paper explores whether an annuity may look more attractive as you go through retirement. Will people who have enjoyed the pension freedoms since 2015 who were in their late 50s and early 60s still feel the same way about these flexibilities in their 70s and 80s?
Key discussion points include:
- We model how the relative attractiveness of drawdown versus annuity may change through retirement;
- The key finding of the modelling is that while drawdown will generally produce better outcomes for those early in retirement, there is often a crossover point later in retirement at which a switch to an annuity may be preferable, and;
- Potential policy implications of these findings. How can and should people be 'nudged' to review how they are managing their money in retirement and whether to switch to an annuity.
