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Annuities - UK - August 2010

This report examines the various factors impacting the UK annuity market. In addition to highlighting the impact of economic, demographic and regulatory factors, wider societal trends such as the increasing popularity of taking a phased approach to retirement are also considered. The report also identifies market strengths and weaknesses as well as innovations and potential opportunities for growth. The final sections of the report detail the findings of Mintel’s exclusively commissioned consumer research into attitudes and behaviour towards annuities and retirement planning in general.

  • There's a sizeable variation in the percentage of impaired life annuities written by different advisers - strongly hinting that more work to be done on raising product awareness among some IFAs.
  • Even among those with a defined contribution pension there's a sizeable proportion who don't know what an annuity is. There's clearly a massive information gap that needs to be filled.
  • Only a third of those with a defined contribution pension know that you can get better rates by shopping around for an annuity.
  • A fifth of older potential annuitants plan to delay buying an annuity in order to get a better income.
  • More affluent pension-holders are more likely to feel that annuities offer poor value for money - but even among higher earners, the proportion only reaches 15%.
  • Increases in inflation have obviously had an impact on the popular consciousness - index-linking is now top of the wish-list when it comes to desired features in an annuity.

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Table of contents

  1. Issues in the Market

      • Key issues
        • Abbreviations
        • Future Opportunities

          • Improving engagement by focusing on individual needs
            • Looking on the bright side of the ‘new reality’
            • Market in Brief

              • New contracts rise slightly as new premiums fall by more than 6%
                • Figure 1: New pension annuity business – number of new contracts and the value of new premiums, 2005-09
              • 10% of total annuities sold are enhanced annuities
                • Figure 2: Number of new enhanced/impaired life annuity contracts and as percentage of total annuities sold, 2005-09
              • Economic and demographic pressures altering the market
                • Pension ownership on the decline but could be boosted by NEST
                  • New government frees up annuity regulatory environment
                    • Open market option not living up to its potential
                      • IFAs still generate the majority of new business
                        • Figure 3: Proportional distribution of the value of new pension annuity premiums, by sales channel*, 2005-09
                      • Market share – Prudential stays on top
                        • Figure 4: Top five providers’ share of the UK annuity market, by new business (APE), 2009
                      • Brand communication and promotion
                        • Competitive context
                          • Key consumer research findings
                            • Pension ownership and retirement income
                              • Retirement plans and expectations
                                • Attitudes and behaviour towards retirement income
                                  • What people are looking for in an annuity
                                  • Internal Market Environment

                                    • Key points
                                      • Falling occupational scheme numbers
                                        • Figure 5: Size of the defined-contribution pension pool, 1998-2008 
                                      • Consumer unawareness and apathy is prevalent
                                        • NEST should benefit the annuity market in the long term…
                                          • …but questions have arisen over its launch as NEST is put under review
                                            • Downward trend in annuity rates likely to continue
                                              • Figure 6: Annual annuity rates and gilt rates, January 1990-June 2010
                                            • Shopping around now more important…
                                              • Figure 7: External versus internal volume sales of new pension annuities – proportional distribution, 2000-09
                                            • …but those with low-value pensions less likely to shop around
                                              • PICA calls for mandatory shopping around
                                                • Key legislative developments
                                                  • Emergency budget loosens up regulatory environment
                                                    • Mandatory annuitisation to be abolished from April 2011
                                                      • Tax payable on pension savings upon death will be set to 55%
                                                        • Increased flexibility for consumers – should be good for providers
                                                          • Default retirement age to be scrapped
                                                            • State pension age set to rise
                                                              • The RDR could lead to more direct sales
                                                                • Advisory bureaux could help those who can’t afford advice
                                                                  • Some advisers looking at ways to profitably service lower-value clients
                                                                    • EU Solvency II directive
                                                                    • Broader Market Environment

                                                                      • Key points
                                                                        • Increasing longevity is costly for annuity providers…
                                                                          • Figure 8: Cohort life expectancy at age 60, by gender, 1981-2056
                                                                        • …but has led to some innovation in pricing strategy
                                                                          • Demand for annuities should rise as population ages
                                                                            • Figure 9: Projected size of the UK population, by age band, 2008-58
                                                                          • Decline in pension fund values hurts demand for annuities
                                                                            • Figure 10: FTSE 100 and FTSE All Share – daily index movements, June 2004-June 2010
                                                                          • The impact of inflation is variable
                                                                            • Figure 11: Monthly changes in the rate of annual inflation* and Bank of England base rate – UK, June 2007-June 2010
                                                                          • Gilt yields continue to fluctuate
                                                                            • Figure 12: Historical monthly medium, long and ultra-long gilt yields, January 2001-June 2010
                                                                          • Earnings making up a growing proportion of pensioner income
                                                                            • Figure 13: Breakdown in gross pensioner income (weekly average at 2008/09 prices), 1996/97-2008/09
                                                                        • Competitive Context

                                                                          • Key points
                                                                            • Income drawdown – the only true alternative to annuitisation
                                                                              • Alternative/supplemental retirement income strategies
                                                                                • ISAs
                                                                                  • Figure 14: ISA sales, by type of ISA, 2003/04-2008/09
                                                                                • Property – Buy-to-let
                                                                                  • Figure 15: New buy-to-let mortgage business, 2003-09
                                                                                • Equity release
                                                                                  • Figure 16: Total value of equity release sales by SHIP members, 1999-2010
                                                                              • Swot

                                                                                  • Figure 17: UK annuity market, SWOT analysis, 2010
                                                                              • Who’s Innovating?

                                                                                • Key points
                                                                                  • AXA Wealth piloting range of new variable annuities
                                                                                    • The MGM Advantage ‘Flexible Income’ asset-backed annuity
                                                                                      • The annuity growth account from Canada Life
                                                                                        • Assureweb continues to expand its capabilities
                                                                                          • Aviva introduces ‘consumer specific’ online retirement income calculator
                                                                                            • CFS launches commissionfreeannuities.com
                                                                                              • Catering to the small pension pot owners
                                                                                                • Tenet launches non-advised annuity outsourcing desk
                                                                                                  • Annuity Clearing House launches outsourcing service
                                                                                                    • Capita Hartshead joins Partnership to expand access to enhanced annuities
                                                                                                      • Age UK to offer annuities service for those small pension funds
                                                                                                      • Market Size and Forecast

                                                                                                        • Key points
                                                                                                          • New contracts up slightly while new premiums down by more than 6%
                                                                                                            • Figure 18: New pension annuity business – number of new contracts and the value of new premiums, 2005-09
                                                                                                          • Annual pension annuity payments continue to rise
                                                                                                            • Figure 19: Pension annuity business in force – payments per annum, 1998-2008
                                                                                                          • More than 40% of annuities are bought with less than £10,000
                                                                                                            • Figure 20: Proportional distribution of annuities sold, by fund size, 2009*
                                                                                                          • Forecast
                                                                                                            • New business volumes will continue to rise ahead of values
                                                                                                              • Figure 21: Forecast of new pension annuity business – number of new contracts and the value of new premiums, 2005-15
                                                                                                            • Factors used in this forecast
                                                                                                            • Market Segment Performance

                                                                                                              • Key points
                                                                                                                • The continued migration away from conventional annuities
                                                                                                                  • Figure 22: Breakdown of pension annuity sales (volume and value), by main product type, 2009 and 2005
                                                                                                                • Enhanced annuities now account for nearly 10% of total annuities sold
                                                                                                                  • Figure 23: Number of new enhanced/impaired life annuity contracts and as percentage of total annuities sold, 2005-09
                                                                                                              • Income Drawdown Overview

                                                                                                                • Key points
                                                                                                                  • The annuity alternative
                                                                                                                    • New income drawdown volumes rise as the value of new business falls
                                                                                                                      • Figure 24: Income drawdown new business*, 2005-09
                                                                                                                    • Average income drawdown fund falls to £75,000
                                                                                                                      • Figure 25: Average pension annuity versus income drawdown premiums, 2005-09
                                                                                                                    • IFAs continue to be primary drivers of new business
                                                                                                                      • Figure 26: New income drawdown premiums, by sales channel, 2005-09
                                                                                                                  • Market Share

                                                                                                                    • Key points
                                                                                                                      • Prudential continues to be the market leader
                                                                                                                        • Figure 27: Top five providers’ share of the UK individual annuity market, by new business (APE), 2009
                                                                                                                      • Top five keep their places despite a down year
                                                                                                                        • Figure 28: Top 15 providers in the UK individual annuity market, by new business (APE), 2009
                                                                                                                    • Companies and Products

                                                                                                                      • Major players
                                                                                                                        • Prudential
                                                                                                                          • Aviva
                                                                                                                            • AEGON Scottish Equitable
                                                                                                                              • Legal & General
                                                                                                                                • Canada Life
                                                                                                                                • Brand Communication and Promotion

                                                                                                                                  • Key points
                                                                                                                                    • Annuity-related adspend down by half in the year to May 2010
                                                                                                                                      • LV Group top advertiser of annuity products
                                                                                                                                        • Figure 29: Adspend, by company in the annuities category in the UK, 2008-10
                                                                                                                                      • The balance shifts to direct mail advertising in 2010
                                                                                                                                        • Figure 30: Overview of media type used to advertise annuities*, 2008-10**
                                                                                                                                    • Channels to Market

                                                                                                                                      • Key points
                                                                                                                                        • Three main channels of distribution
                                                                                                                                          • More new business going direct but IFAs are holding their ground
                                                                                                                                            • Figure 31: Proportional distribution of the value of new pension annuity premiums, by sales channel*, 2005-09
                                                                                                                                          • Technology has also contributed to the rise in direct sales
                                                                                                                                          • The Consumer – Pension Ownership and Retirement Income

                                                                                                                                            • Key points
                                                                                                                                              • Pension ownership
                                                                                                                                                • Just over a third of non-retired adults own a pension
                                                                                                                                                  • Figure 32: Savings and investment products owned, June 2010
                                                                                                                                                • Over half of those with a pension have a DC scheme
                                                                                                                                                  • Figure 33: Proportion of pension holders with a DB scheme vs. any type of DC scheme, June 2010
                                                                                                                                                • Below-average pension ownership for under-35s
                                                                                                                                                  • Figure 34: Pension product ownership, by gender and age, June 2010
                                                                                                                                                • Social status and income levels key indicators of pension ownership
                                                                                                                                                  • Figure 35: Pension product ownership, by socio-economic group, June 2010
                                                                                                                                                  • Figure 36: Pension product ownership, by gross annual household income, June 2010
                                                                                                                                                • Retirement Income
                                                                                                                                                  • Retirement strategy and ownership of income-producing assets
                                                                                                                                                    • Figure 37: Cross-analysis of select financial products owned, June 2010
                                                                                                                                                  • Demographics: Competing for the same consumer
                                                                                                                                                    • Figure 38: Potential retirement strategies (product ownership), by gender, age, socio-economic group, lifestage, marital status and gross annual household income, June 2010
                                                                                                                                                • The Consumer – Retirement Plans and Expectations

                                                                                                                                                  • Key points
                                                                                                                                                    • Confidence in retirement savings
                                                                                                                                                      • Only a minority absolutely certain of a comfortable retirement
                                                                                                                                                        • Figure 39: Confidence that personal savings will provide a comfortable retirement, June 2010
                                                                                                                                                      • More will work past retirement age or rely on home equity for income
                                                                                                                                                        • Confidence in retirement savings by product ownership
                                                                                                                                                          • Figure 40: Confidence that personal savings will provide a comfortable retirement, by ownership of select saving and investment products, June 2010
                                                                                                                                                        • Lack of confidence among people nearing retirement age
                                                                                                                                                          • Figure 41: Confidence that personal savings will provide a comfortable retirement, by gender, age, lifestage, marital status and region, June 2010
                                                                                                                                                        • Outright homeowners and the affluent most upbeat about their prospects
                                                                                                                                                          • Figure 42: Confidence that personal savings will provide a comfortable retirement, by socio-economic group, working status, household income and tenure, June 2010
                                                                                                                                                        • Broadsheet readers and those banking online most confident
                                                                                                                                                          • Figure 43: Confidence that personal savings will provide a comfortable retirement, by media usage, June 2010
                                                                                                                                                        • Years until retirement
                                                                                                                                                          • Just under a third with a pension plan to retire within the next ten years
                                                                                                                                                            • Figure 44: Years until retirement or the scaling back of working hours, June 2010
                                                                                                                                                          • Potential annuitants more confident than most
                                                                                                                                                            • Figure 45: Confidence that personal savings will provide a comfortable retirement, by years until retirement or the scaling back of working hours, June 2010
                                                                                                                                                          • More than a quarter retiring in five years or less have a DC scheme
                                                                                                                                                            • Figure 46: Years until retirement or the scaling back of working hours, by ownership of select saving and investment products, June 2010
                                                                                                                                                          • Years to retirement and age – Phased approach gaining momentum
                                                                                                                                                            • Figure 47: Years until retirement or the scaling back of working hours, by age, June 2010
                                                                                                                                                        • The Consumer – Attitudes and Behaviour towards Retirement Income

                                                                                                                                                          • Key points
                                                                                                                                                            • A quarter of DC pension owners unacquainted with annuities
                                                                                                                                                                • Figure 48: Attitudes and behaviour towards annuities/retirement income, June 2010
                                                                                                                                                              • More frequent communication with pension savers needed
                                                                                                                                                                • Over a third say they are aware of the OMO
                                                                                                                                                                  • Scope to get more women interested in annuities
                                                                                                                                                                    • Figure 49: Attitudes and behaviour towards annuities/retirement income, by gender and age, June 2010
                                                                                                                                                                  • Engaging people at a younger age will help them to manage expectations
                                                                                                                                                                    • Well off most aware of the OMO
                                                                                                                                                                      • Figure 50: Attitudes and behaviour towards annuities/retirement income, by socio-economic group and gross annual household income, June 2010
                                                                                                                                                                  • The Consumer – What People Are Looking For in an Annuity

                                                                                                                                                                    • Key points
                                                                                                                                                                      • Link to inflation top desired feature
                                                                                                                                                                        • Figure 51: What people with a DC pension are looking for in an annuity, June 2010
                                                                                                                                                                      • Flexibility and retirement income security for partner also top factors
                                                                                                                                                                        • Desired features better defined the closer one is to retirement
                                                                                                                                                                          • Figure 52: What people with a DC pension are looking for in an annuity, by gender and age, June 2010
                                                                                                                                                                        • Well off more likely to be interested flexibility and guarantees
                                                                                                                                                                          • Figure 53: What people with a DC pension are looking for in an annuity, by socio-economic group and gross annual household income, June 2010
                                                                                                                                                                      • Appendix – Broader Market Environment

                                                                                                                                                                          • Figure 54: Trends in the age structure of the UK population, by gender, 2004-14
                                                                                                                                                                          • Figure 55: Average gross weekly income of pensioner units*, by age, 2008/09
                                                                                                                                                                          • Figure 56: UK economic activity among people of pension age, by gender, 2002-08
                                                                                                                                                                      • Appendix – Market Size and Forecast

                                                                                                                                                                          • Figure 57: Number of annuities sold, by size of fund, 2005-09
                                                                                                                                                                      • Appendix – Brand Communication and Promotion

                                                                                                                                                                          • Figure 58: Adspend in the annuities category in the UK, by media type, 2008-10
                                                                                                                                                                          • Figure 59: Adspend by companies in the annuities category in the UK, by media type, 2010
                                                                                                                                                                      • Appendix – Channels to Market

                                                                                                                                                                          • Figure 60: New pension annuity premiums, by sales channel, 2005-09
                                                                                                                                                                      • Appendix – The Consumer – Pension Ownership and Retirement Income

                                                                                                                                                                          • Figure 61: Ownership of select saving and investment products, by demographics, June 2010
                                                                                                                                                                      • Appendix – The Consumer – Retirement Plans and Expectations

                                                                                                                                                                          • Figure 62: Confidence that personal savings will provide a comfortable retirement, June 2010
                                                                                                                                                                          • Figure 63: Years until retirement/scaling back working hours, June 2010
                                                                                                                                                                          • Figure 64: Confidence that personal savings will provide a comfortable retirement, by demographics, June 2010
                                                                                                                                                                          • Figure 65: Years till retirement/scaling back working hours, by demographics, June 2010
                                                                                                                                                                      • Appendix – The Consumer – Attitudes and Behaviour towards Retirement Income

                                                                                                                                                                          • Figure 66: Attitudes and behaviour towards annuities/retirement income, by demographics, June 2010
                                                                                                                                                                      • Appendix – The Consumer – What People Are Looking For in an Annuity

                                                                                                                                                                          • Figure 67: What people with a DC pension are looking for in an annuity, by demographics, June 2010

                                                                                                                                                                      Companies Covered

                                                                                                                                                                      • Abbey
                                                                                                                                                                      • Aegon UK
                                                                                                                                                                      • Association of British Insurers
                                                                                                                                                                      • Aviva Plc
                                                                                                                                                                      • AXA UK plc
                                                                                                                                                                      • Bank of England
                                                                                                                                                                      • Barclays Bank plc
                                                                                                                                                                      • Canada Life Limited
                                                                                                                                                                      • Chelsea Building Society
                                                                                                                                                                      • Co-operative Group
                                                                                                                                                                      • Council of Mortgage Lenders
                                                                                                                                                                      • Debt Management Office (DMO)
                                                                                                                                                                      • Department for Work and Pensions
                                                                                                                                                                      • Deutsche Bank AG
                                                                                                                                                                      • Dunfermline Building Society
                                                                                                                                                                      • Fidelity Investment Services Limited
                                                                                                                                                                      • Financial Services Authority (The)
                                                                                                                                                                      • Friends Provident plc
                                                                                                                                                                      • Government Actuary's Department (GAD)
                                                                                                                                                                      • Hargreaves Lansdown Plc
                                                                                                                                                                      • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                                                      • Kingfisher UK & Ireland
                                                                                                                                                                      • Legal & General Group PLC
                                                                                                                                                                      • Lighthouse Group Plc
                                                                                                                                                                      • Lloyds Banking Group
                                                                                                                                                                      • Northern Rock plc
                                                                                                                                                                      • Principality Building Society
                                                                                                                                                                      • Royal Albert Hall
                                                                                                                                                                      • Royal Bank of Scotland Group plc
                                                                                                                                                                      • Safe Home Income Plans (SHIP)
                                                                                                                                                                      • Saga Services (finance)
                                                                                                                                                                      • Scottish Widows Bank plc
                                                                                                                                                                      • Skandia UK
                                                                                                                                                                      • Skipton Building Society
                                                                                                                                                                      • Tenet Group Ltd
                                                                                                                                                                      • Winterthur Life UK Limited
                                                                                                                                                                      • Yorkshire Building Society

                                                                                                                                                                      Annuities - UK - August 2010

                                                                                                                                                                      £1,995.00 (Excl.Tax)