FCA retirement income data 2018-2024 – annuity analysis

01 January 2025

Written by Mark Ormston, Director of Propositions and Corporate Partnerships

The Financial Conduct Authority (FCA) publishes its ‘Retirement income market data’ report every year. Retirement Line’s Mark Ormston has created an analysis of the annuity-related aspects of these reports for 2018 to 2024. 

The FCA uses its market data to monitor actions consumers take when accessing their defined contribution pension savings. The industry as a whole can also use this data to better understand consumer behaviour and inform decision making.

Mark Ormston has extracted annuity-related information from the data and brought it into a document anyone can access. He says: “I wanted to provide the pensions industry with a single source for analysis of annuity trends from the FCA data. 

“I will endeavour to update the document each year, as soon as possible after the FCA publishes its latest report. This is typically between September and December.”

You can find Mark’s full analysis of the FCA annuity data here and read below for his summary of the main points. Most of the data used in Mark’s report has been taken from the latest FCA retirement income market data full data tables.

Contents:

Important: use of the word ‘pot’

Size of the annuity market

The age of people purchasing annuities

The size of pension pots used to buy annuities

Where do people purchase their annuities?

Single life vs joint life annuities

Level payments vs escalating payments

With or without value protection?

With or without a guarantee period?

The use of regulated advice 

The use of Pension Wise guidance 

Summary

Important: use of the word ‘pot’

Before we get into the data, it is worth mentioning the way that the FCA uses the word ‘pot’. Throughout the data, there is mention of a ‘pot’ used to buy an annuity. My understanding is that the FCA uses ‘pot’ to mean a single annuity purchase. 

In reality, people often use more than one pot to make an annuity purchase, so this needs to be remembered when unpicking the data.

Size of the annuity market

There was a noticeable increase in the number of annuities purchased in the period 2023-24. Likewise, the total amount of pension funds used to buy annuities also increased in that period. 

This trend is largely expected, as annuity rates have been at their highest point for some time. However, it’s still the case that only around 10% of pension pots are used to buy an annuity. Annuities sit below income drawdown and taking all of a pension pot in cash in the retirement income league table.

The age of people purchasing annuities

The cohort that purchased the highest number of annuities in 2023-24 was aged 65-74. This age band has been increasing throughout the reporting periods, with the 55-64 age band in decline. This may in part reflect the fact that people are leaving the workforce later in recent years.

Interestingly, the 75+ age band, which started seeing some growth, has plateaued. This is despite some predictions of many more annuities being purchased at the age of 75+.

The size of pension pots used to buy annuities

The most consistent pot size (after payment of any Pension Commencement Lump Sum) bracket over the past six years has been £10,000-£29,000. This typically makes up nearly a quarter of all annuity purchases in most reporting periods.

However, a trend for the past two years has been for an increase in the percentage of annuities purchased with pots in the £50,000-£99,000 and £100,000-£249,000 categories.

Also, in the last couple of reporting periods, the number of purchases involving pots of less than £10,000 has dropped significantly. This category made up 27% of annuity purchases in 2021-22, but just 9% in 2023-24. 

To simplify matters, when we look at pot sizes in two categories – above and below £50,000 – we see that the gap is narrowing. Where previously there was typically a 60%-40% split between pots under and above £50,000, in 2023-24 the split had narrowed to 52%-48%.

It’s not easy to definitively explain these trends in pot sizes without further research. Factors such as the recent rise in annuity rates and the effect of auto-enrolment in pension saving may be at play, among others.

Where do people purchase their annuities?

The FCA data splits annuity sources into three categories:

• Annuities purchased from the customer’s existing pension scheme provider (classified by the FCA as “purchased by existing customers”).

• Annuities purchased directly from another annuity provider (“purchased by a new customer”).

• Annuities purchased via a 3rd party, such as an annuity broker or financial adviser (“purchased via a 3rd party including panels”).

Annuities purchased from someone’s existing provider has long been the largest category. But in 2023-24, for the first time, most people went elsewhere. Many proactively shopped around providers for the best annuity rate. 

This is an encouraging sign, as better rates mean more income and a more comfortable retirement for consumers.

As the table below shows, those with a pot size of £50,000 and upwards are more likely to shop around than those with smaller pots. This is perhaps unsurprising, assuming that people with larger pots are more driven to invest time in shopping around than those with smaller retirement savings. 

However, everyone might potentially achieve a better annuity rate and more income by shopping around. Some consumers with smaller pots are especially in need of every extra penny of retirement income. This is why ongoing work to encourage even more pension savers to shop around is so important.

Single life vs joint life annuities

With a single life annuity, when the individual dies, the annuity income is no longer paid. But with a joint life annuity, a beneficiary will receive income after the death of the annuity holder.

About two-thirds of people purchase their annuity on a single life basis. However, the percentage sold on a joint life basis has been slowly increasing in recent years.

Level payments vs escalating payments

The number of customers choosing level payments – where the annuity income stays the same every year – continues to hold at above 80%. 

That said, there has been a small increase in the number of annuities being purchased with escalating annuity payments. This is where payments start smaller but rise each year in line with a fixed percentage or the retail price index.

The recent period of high inflation might be driving this small uptick in the popularity of escalating payments. More people may now want the protection of escalating payments in case of inflation events in the years ahead. 

With or without value protection?

Value protection (also known as capital protection) is a form of annuity death benefit. It’s where the annuity provider will pay a lump sum to a beneficiary when the annuity holder dies. The size of this payment depends on how much of their fund someone wishes to protect. The more they protect, the lower their annuity income while they are alive.

There has been a small increase in the take-up of this option throughout the FCA data reporting periods. However, only around 6% of all annuity purchases include this option. 

With annuity rates being so competitive at the moment, longer length guarantee periods (see below) can often achieve similar results as value protection and be more cost-effective.

With or without a guarantee period?

A guarantee period is where the annuity provider pays income for a guaranteed term, even if the annuity holder passes away within that period. Upon death, a chosen beneficiary receives income for the remainder of that period. Choosing a guaranteed period will mean the annuity holder receives less income from the annuity while they are alive.

This appears to be the most popular type of annuity death benefit, with around three quarters of all annuities including it.

The use of regulated advice 

In the latest reporting period, the number of annuities purchased through regulated advice hit its highest point to date. Nearly a third of all annuities purchased were done so through regulated financial advice. 

Today’s higher annuity rates might be driving this. More people who typically use a financial adviser could now be motivated to choose an annuity for some of their retirement income.

Of course, people don’t have to pay for regulated advice before an annuity purchase. Thousands each year find that they can reach a decision about retirement income on their own, or with guidance from a non-advised service such as Retirement Line’s.

The use of Pension Wise guidance 

Somewhat surprisingly, annuity purchases after using the government-backed Pension Wise dropped dramatically in the 2022-23 reporting period and remained static in the following year.

I am not certain what is behind such a dramatic fall, although there may be a link to the pot sizes of Pension Wise users who buy an annuity. 

In the reporting period 2021-22, 47% of annuities purchased after speaking to Pension Wise involved a pot size of less than £10,000. In the latest reporting period, the figure was just 8%.

Summary

When delving into the annuity-related aspects of the FCA data, some interesting trends emerge. I was particularly interested in the fact that people purchasing annuities seem to be slightly older than was previously the case. Also, the information about pot sizes used to buy an annuity makes interesting reading, although the reasons behind the data are not entirely clear.

But perhaps most striking of all is the fact that, for the first time, more people bought an annuity elsewhere rather than accepting the offer from their pension scheme. I hope this represents a sea-change in consumer behaviour, although I also hope that we see this trend also extend to people with smaller pension pots.

I hope that this summary and my full analysis document prove useful for anyone with an interest in the annuity market. Please do let me know via mark.ormston@retirementline.co.uk if you have any questions or feedback, or indeed should you spot any errors in my analysis.