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Alternative Retirement Strategies - UK - September 2009

The structure of the retirement planning market is constantly shifting. The personal pension was launched more than two decades ago, and since then there has been a steady stream of new legislation intended to widen its appeal. The savings gap remains, however, and for many people the pension is part of the problem. It is perceived as being overly complex and inflexible, while a succession of mis-selling scandals has seriously dented public confidence in the trustworthiness of pensions advisers.

It is not just the structure and a lack of trust that puts people off investing in pensions. The average UK consumer is notoriously risk-averse and wary of investing hard-earned money in any kind of equity-based product. Instead of a US-style culture of equity investment, Britons are famous for their love of property – for most, their home is their main investment and the development of the buy-to-let mortgage led to a boom in property investment.

This report examines the factors that have led many people to shun the traditional pension, as well as those factors that mean that saving for retirement – inside or outside a pension wrapper – is becoming increasingly important. The main pension alternatives are identified, and the size of these competing markets assessed. Consumer research examines the range of long-term investments that people hold alongside their pension, as well as broader attitudes towards retirement savings.

Key issues

  • The impact of growing life expectancy and the associated increase in the cost of providing an income in retirement.

  • Consumer reaction to the slowdown, and falls in both property and equity values.

  • The growth of property as an alternative to traditional investment vehicles, and the impact of the credit crunch on the availability of property finance.

  • How non-pension investments fit into consumers’ broader portfolio of assets.

  • Lifestyle expectations in retirement, and the growth of phased retirement.

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Table of contents

  1. Issues in the Market

      • Key issues
        • Scope of the report
          • Abbreviations
          • Future Opportunities

            • Beating the apathy trap – educating the consumer
              • Getting people to think about when they will be able to retire
                • Encouraging people to think about how they might use their savings
                  • Flexibility is key
                  • Market in Brief

                    • The rigidity of pensions is a deterrent for some people
                      • An ageing population is a major cause for concern in the UK…
                        • …and tough economic conditions have hit investors
                          • Pension contributions have fallen during the recession
                            • Figure 1: Total new premiums paid into individual and occupational pensions, 2003-08
                          • Cash ISA subscriptions have grown strongly
                            • Figure 2: Amounts subscribed to ISAs, by cash and stocks and shares components, 2002/03-2008/09
                          • Buy-to-let lending has dried up during the recession
                            • Figure 3: Number and value of new buy-to-let mortgage advances, 2000-09
                          • The equity release market has held up relatively well
                            • Figure 4: Total value of new equity release sales by SHIP members, 1991-2009
                          • Intermediaries dominate the BTL and equity release markets
                            • Three fifths of people have non-pension potential retirement savings
                              • Figure 5: Overview of retirement income strategies among the non-retired population, June 2009
                          • Internal Market Environment

                            • Key points
                              • Control and flexibility are key factors
                                • Pensions are also seen as risky
                                  • A lack of trust prompts some to shun pensions
                                    • Working longer to fund retirement
                                      • The recession has forced some people to rethink plans
                                        • People are apathetic towards retirement planning…
                                          • Figure 6: Reasons for not saving, June 2008
                                        • …prompting the government to launch a new scheme
                                          • Buy-to-let – a sector in tatters…
                                            • …but the long-term trend is more positive
                                              • Figure 7: Tenure structure of dwellings (index of number of dwellings, 1991=100), 1991-2007
                                              • Figure 8: The annual rate of return on BTL (geared investment and cash purchase), Q1 2006-Q4 2008
                                            • Regulation is a burden for private landlords
                                              • Equity release also suffers from a trust shortfall…
                                                • …but tighter regulation should improve the industry’s image
                                                  • Increasing IFA involvement in the sector
                                                    • The popularity of ISAs continues to rise…
                                                      • …but low interest rates and stockmarket volatility are an issue
                                                        • A few key changes last year have simplified the ISA regime
                                                          • Figure 9: Recent and proposed changes to the ISA scheme, 2004-20
                                                        • Efforts being made to speed up ISA transfers
                                                        • Broader Market Environment

                                                          • Key points
                                                            • People are living longer…
                                                              • Figure 10: Cohort life expectancy at age 60, by gender, 1981-2056
                                                            • …with the old age dependency ratio increasing as a result
                                                              • Figure 11: Projected size of the UK population, by age band, 2010-56
                                                            • Benefits now account for less of total pensioner income…
                                                              • Figure 12: Breakdown in gross pensioner income (weekly average at constant prices, 2007-08), 1994/95-2007/08
                                                            • …forcing many pensioners to work during their retirement
                                                              • Figure 13: UK economic activity, by gender and age, 2004-14
                                                            • The low base rate is not good news for savers
                                                              • Figure 14: Base rate, January 2002-June 2009
                                                            • House prices have tumbled in the recession…
                                                              • Figure 15: Average house prices, January 2002-June 2009 (monthly data, seasonally adjusted)
                                                            • …as have global stock markets
                                                              • Figure 16: FTSE-100 and FTSE-All Share, daily values, January 2000-June 2009
                                                          • Competitive Context: The Pensions Market

                                                            • Key points
                                                              • Pensions are the traditional way of saving for retirement
                                                                • Contributions into individual pension schemes fell in 2008
                                                                  • Figure 17: Total new premiums paid into individual and occupational pensions, 2003-08
                                                                • SIPPs have grown increasingly popular
                                                                  • Figure 18: New individual pension premiums, by product type, 2003-08
                                                                • Occupational pension schemes are closing fast…
                                                                  • Figure 19: Number of private sector occupational pension schemes, by status, 2006 and 2007
                                                                • …with the decline seen mostly in the private sector
                                                                  • Figure 20: Number of occupational pension scheme members, by sector, 1991-2007
                                                              • SWOT Analysis

                                                                  • Figure 21: Alternative retirement strategies – SWOT analysis, 2009
                                                              • Market Size

                                                                • Key points
                                                                  • Sizing the pension alternatives
                                                                    • Cash ISA subscriptions have increased by 51% since 2002/03…
                                                                      • Figure 22: Amounts subscribed to ISAs, by cash and stocks and shares components, 2002/03-2008/09
                                                                    • …while stocks and shares subscriptions have been more volatile
                                                                      • Turning emergency savings into retirement savings
                                                                        • Sales of collective investments have fallen in the downturn…
                                                                          • Figure 23: Retail sales of unit trusts and OEICs by IMA members, 1998-2008
                                                                        • …with minimal net new sales
                                                                          • Buy-to-let lending has fallen sharply…
                                                                            • Figure 24: Number and value of new buy-to-let mortgage advances, 2000-09
                                                                          • …with many lenders exiting the market
                                                                            • Signs that people are being forced to turn to equity release?
                                                                              • Figure 25: Total value of new equity release sales by SHIP members, 1991-2009
                                                                            • Meeting a shortfall between income and expenditure
                                                                            • Brand Communication and Promotion

                                                                              • Key points
                                                                                • Adspend reflects dominant role of intermediaries
                                                                                  • Figure 26: Retirement planning-related advertising expenditure, by sub-category, 2007-09
                                                                                • The casualties of a slowdown
                                                                                  • Figure 27: Retirement planning-related advertising expenditure, top 20 companies, 2007-09
                                                                                • Intermediary press the key marketing channel
                                                                                  • Figure 28: Retirement planning-related advertising expenditure, by media type, 2007-09
                                                                              • Channels to Market

                                                                                • Key points
                                                                                  • Bank staff and IFAs the key route to market
                                                                                    • Figure 29: Preferred sources of investment advice, April 2009
                                                                                  • Within equity ISAs, fund supermarkets and tied agents dominate
                                                                                    • Figure 30: Gross retail sales of unit trust and OEIC ISAs, by distribution channel, 2004-08
                                                                                  • Intermediaries dominate the BTL sector…
                                                                                    • …as they also do in the equity release market
                                                                                      • Figure 31: Value of sales of equity release products by SHIP members, by distribution channel, 2003-08
                                                                                    • Cash ISAs primarily sold direct
                                                                                    • The Consumer – Savings and Pension Ownership

                                                                                      • Key points
                                                                                        • An overview of retirement savings among the non-retired population
                                                                                            • Figure 32: Overview of retirement income strategies among the non-retired population, June 2009
                                                                                          • Alternative retirement strategies are more likely to be pursued by pension holders
                                                                                            • Figure 33: Overview of different financial products owned, June 2009
                                                                                          • Ability to save is governed by age and income
                                                                                            • Figure 34: Potential retirement strategies, by key demographics, June 2009
                                                                                          • Alternative retirement funding – the preserve of the wealthy
                                                                                            • Figure 35: Non-pension retirement savings, by key demographics, June 2009
                                                                                          • Multiple product ownership increases among third agers
                                                                                            • Figure 36: Repertoire of number of financial products owned, June 2009
                                                                                          • Alternative retirement products sit alongside more traditional products
                                                                                            • Figure 37: Cross-analysis of product ownership, June 2009
                                                                                        • The Consumer – Retirement Expectations

                                                                                          • Key points
                                                                                            • Retirement expectations are fairly mixed
                                                                                                • Figure 38: Financial expectations at retirement, June 2009
                                                                                              • Retirement expectations change with age and affluence
                                                                                                • Figure 39: Financial expectations at retirement, by key demographics, June 2009
                                                                                              • Property income boosts retirement expectations
                                                                                                • Figure 40: Retirement product ownership, by financial expectations at retirement, June 2009
                                                                                              • Multiple product ownership raises retirement expectations
                                                                                                • Figure 41: Financial expectations at retirement, by repertoire of number of financial products owned, June 2009
                                                                                              • State pension age is still the goal for the majority
                                                                                                  • Figure 42: Retirement plans, June 2009
                                                                                                • Third agers face up to retirement reality
                                                                                                  • Figure 43: Retirement plans, by key demographics, June 2009
                                                                                                • Alternative retirement plans provide flexibility
                                                                                                  • Figure 44: Retirement product ownership, by retirement plans, June 2009
                                                                                                • A gap in retirement planning
                                                                                                  • Figure 45: Retirement plans, by financial expectations at retirement, June 2009
                                                                                              • The Consumer – Attitudes towards Retirement Planning

                                                                                                • Key points
                                                                                                  • There is some realism over retirement issues
                                                                                                      • Figure 46: Attitudes towards retirement and retirement planning in general, June 2009
                                                                                                    • Appeal of alternative retirement plans increases with age and income
                                                                                                      • Figure 47: Responses to the statement ‘I don’t like the thought of tying my retirement savings up in a pension – alternative investments are much more flexible’, by age and gross annual household income, June 2009
                                                                                                    • Alternative retirement funds complement rather than replace pensions
                                                                                                      • Figure 48: Attitudes towards retirement and retirement planning in general, by potential retirement strategies, June 2009
                                                                                                    • Is support for alternative products rooted in a mistrust of pensions?
                                                                                                      • Figure 49: Attitudes towards retirement and retirement planning in general, by financial expectations at retirement, June 2009
                                                                                                    • Multiple products reduces the dependency on the state pension
                                                                                                      • Figure 50: Attitudes towards retirement and retirement planning in general, by repertoire of number of financial products owned, June 2009
                                                                                                    • Target group analysis
                                                                                                      • Figure 51: Retirement planning target groups, June 2009
                                                                                                    • Diligent retirement planners (15%)
                                                                                                      • Unsure and under-prepared (56%)
                                                                                                        • Leaving a legacy (13%)
                                                                                                          • Living for today (16%)
                                                                                                            • Diligent retirement planners more likely to have an equity ISA
                                                                                                              • Figure 52: Financial products owned, by target groups, June 2009
                                                                                                            • People who are unsure and under-prepared don’t really care
                                                                                                              • Figure 53: Attitudes towards retirement and retirement planning in general, by target groups, June 2009
                                                                                                            • Legacy leavers expect a good quality of life in retirement
                                                                                                              • Figure 54: Financial management after retirement, by target groups, June 2009
                                                                                                          • Appendix – Market Background and Definitions

                                                                                                            • Pension-based retirement planning
                                                                                                              • Figure 55: Types of private pension provision in the UK
                                                                                                            • Occupational schemes
                                                                                                              • Individual pensions
                                                                                                                • Group pensions
                                                                                                                  • Benefit structures
                                                                                                                    • Other definitions
                                                                                                                      • Non-pension-based retirement planning
                                                                                                                        • ISAs
                                                                                                                          • Buy-to-let
                                                                                                                            • Equity release
                                                                                                                              • Investment bonds from life companies
                                                                                                                                • Collective investments
                                                                                                                                  • National Pension Savings Scheme
                                                                                                                                    • Qualifying schemes
                                                                                                                                      • Implementation
                                                                                                                                      • Appendix – Competitive Context (The Pensions Market)

                                                                                                                                          • Figure 56: Number of private sector occupational pension schemes in the UK, by scheme size, 2002-07
                                                                                                                                      • Appendix – The Consumer – Savings and Pension Ownership

                                                                                                                                          • Figure 57: Repertoire of number of financial products owned, by demographics, June 2009
                                                                                                                                      • Appendix – The Consumer – Attitudes towards Retirement Planning

                                                                                                                                          • Figure 58: Most popular attitudes towards retirement and retirement planning in general, by demographics, June 2009
                                                                                                                                          • Figure 59: Next most popular attitudes towards retirement and retirement planning in general, by demographics, June 2009 (continued)
                                                                                                                                          • Figure 60: Retirement planning target groups, by demographics, June 2009

                                                                                                                                      Companies Covered

                                                                                                                                      • Abbey
                                                                                                                                      • Asda Group Ltd
                                                                                                                                      • Association of British Insurers
                                                                                                                                      • Association of Residential Letting Agents
                                                                                                                                      • Aviva Plc
                                                                                                                                      • Bank of England
                                                                                                                                      • Barclays Bank plc
                                                                                                                                      • British Bankers' Association (BBA)
                                                                                                                                      • British Broadcasting Corporation (BBC)
                                                                                                                                      • Chartered Institute of Personnel and Development [CIPD]
                                                                                                                                      • Co-operative Group
                                                                                                                                      • Council of Mortgage Lenders
                                                                                                                                      • Department for Work and Pensions
                                                                                                                                      • F&C Management Limited
                                                                                                                                      • Fidelity Investment Services Limited
                                                                                                                                      • Financial Services Authority (The)
                                                                                                                                      • Friends Provident plc
                                                                                                                                      • Gfk NOP
                                                                                                                                      • Government Actuary's Department (GAD)
                                                                                                                                      • Hargreaves Lansdown Plc
                                                                                                                                      • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                      • Henderson Global Investors
                                                                                                                                      • ING Direct
                                                                                                                                      • Invesco Perpetual
                                                                                                                                      • Investment Management Association
                                                                                                                                      • M&G Group
                                                                                                                                      • National Association of Pension Funds
                                                                                                                                      • Nationwide Building Society
                                                                                                                                      • NatWest
                                                                                                                                      • New Star Asset Management Ltd
                                                                                                                                      • Newcastle Building Society Limited
                                                                                                                                      • Office for National Statistics
                                                                                                                                      • Royal Bank of Scotland Group plc
                                                                                                                                      • Safe Home Income Plans (SHIP)
                                                                                                                                      • Scottish Widows Bank plc
                                                                                                                                      • Standard Life Assurance Company

                                                                                                                                      Alternative Retirement Strategies - UK - September 2009

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