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Annuities - UK - August 2011

The different products examined in the report include:

Lifetime annuity – this is where the accumulated pension fund is converted into a regular and guaranteed stream of income during retirement. The amount of income an individual gets from an annuity product depends on the size of their pension fund, annuity rates, the type of product they opt for and various personal factors, such as their age, medical history and, historically, gender. (Note that as from 21 December 2011, annuity providers will no longer be able to factor in gender when setting rates).

There are several sub-categories of annuity available on the market, as outlined below.

  • Escalating (or increasing) annuity
  • Impaired life/enhanced annuity
  • Investment-linked annuity
  • Value-protected annuity

Single- and joint-life policies

All of the above types of annuity can be either single-life or joint-life products.

  • Single-life annuity
  • Joint-life annuity

Open market option

  • Internal pension annuity
  • External pension annuity

Alternative solutions

  • Income drawdown
  • Capped drawdown plan
  • Flexible drawdown plan
  • Short-term annuity
  • Combined solution

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Table of contents

  1. Introduction

      • Report scope and product definitions
        • Figure 1: Overview of the annuity and retirement income market, 2011
      • Single- and joint-life policies
        • Open market option
          • Alternative solutions
            • Abbreviations
            • Executive Summary

                • The market
                  • Total annuity sales fell in 2010…
                    • Figure 2: Forecast of new pension annuity sales – fan chart, 2006-16
                  • … but non-conventional annuities experienced rising demand
                    • Key factors
                      • Market conditions and economic backdrop
                        • Key legislative changes
                          • Improvement in OMO sales
                            • Income drawdown is the main alternative to buying an annuity
                              • Figure 3: New volume sales of pension annuities versus income drawdown plans (insurance-administered sector only), 2005-10
                            • Companies, brands and innovation
                              • Top five control around three fifths of the market
                                • Figure 4: Top five providers’ estimated share of the UK annuity market, by new business (APE), 2010
                              • Product innovation
                                • Intermediaries generate the lion’s share of new business
                                  • Figure 5: New pension annuity premiums, by sales channel, 2006 -10
                                • The consumer
                                  • What proportion of UK adults have a pension?
                                    • Figure 6: Ownership of pension products by type, June 2011
                                  • When are they planning to retire?
                                    • Figure 7: When planning to retire, June 2011
                                  • What are DC pension savers likely to do with their pension fund when they retire?
                                    • Figure 8: Income options planning to take or consider at retirement by DC pension savers, June 2011
                                  • What we think
                                  • Issues in the Market

                                      • How will NEST affect the future annuitant customer base?
                                        • Which providers are set to benefit?
                                          • How interested are consumers in their retirement income options?
                                            • Are people more likely to shop around for an annuity in the future?
                                              • When do people expect to retire?
                                              • Future Opportunities

                                                  • Trend: Working on, retiring later
                                                    • Trend: Making life simple for people, but also clearer
                                                    • Internal Market Environment

                                                      • Key points
                                                        • Strong growth in annual annuity payments
                                                          • Figure 9: Pension annuity business in force – payments per annum, 1998-2009
                                                        • DC pension pool has declined slightly since 2003…
                                                          • Figure 10: Size of the DC pension pool, 1998-2009
                                                        • … but the introduction of NEST will reverse this trend…
                                                          • … and boost the potential future annuitant customer base by up to 9 million
                                                            • NEST will impose a 1.8% contribution charge on members
                                                              • Investment strategy governed by a pre-determined retirement date
                                                                • Impact on existing pension arrangements
                                                                    • Figure 11: Likely strategies to be used by (large) employers to meet increased costs resulting from the new pension reforms, 2011
                                                                  • Annuity providers also have concerns
                                                                    • Annuity rates remain under pressure from low gilt rate
                                                                      • Figure 12: Annual annuity income and gilt rates, January 1990-July 2011
                                                                    • Annuity rates move towards gender parity after court ruling
                                                                      • Customer inertia helps to maintain the status quo
                                                                        • Figure 13: Share of external versus internal new pension annuity sales, 2000-10
                                                                      • ABI launches guide to help customers shop around for an annuity
                                                                        • Transfer times continue to improve
                                                                          • End of compulsory annuitisation by age 75
                                                                            • New capped versus flexible income drawdown products introduced
                                                                              • Changes to tax treatment of lump-sum death benefits
                                                                                • Figure 14: Summary of tax treatment of lump-sum death benefits, pre- and post-April 2011
                                                                              • Trivial commutation rules under review
                                                                                • Other developments and issues affecting the wider pension industry
                                                                                • Broader Market Environment

                                                                                  • Key points
                                                                                    • Demographic trends
                                                                                      • Increasing longevity puts downward pressure on annuity rates
                                                                                        • Figure 15: Cohort life expectancy at age 65, by gender, 1981-2058
                                                                                      • One in five UK citizens are currently over state pension age
                                                                                        • Figure 16: Projected size of the UK population, by age band, 2010-58
                                                                                      • UK workforce comprises a rising number of over-65s
                                                                                        • Economic and investment environment
                                                                                          • Slow economic growth requires a staggered introduction of new pension reform
                                                                                            • Higher inflation requires pension savings to work harder
                                                                                              • Figure 17: Average annual changes in the Bank of England base rate, CPI and RPI – UK, 2003-12
                                                                                            • Increased market volatility prompts some to delay buying an annuity
                                                                                              • Figure 18: FTSE 100 and FTSE All-Share – daily index movements, June 2002-June 2011
                                                                                            • Eurozone debt crisis could jeopardise the economic recovery in the UK
                                                                                              • Corporate bond yields moving moderately lower
                                                                                                • Gilt yields also recede, putting pressure on annuity rates
                                                                                                  • Figure 19: Historical monthly medium, long and ultra-long gilt yields, January 2001-June 2011
                                                                                              • Competitive Context

                                                                                                • Key points
                                                                                                  • The main rival product solutions
                                                                                                    • Income drawdown is the main alternative to buying an annuity…
                                                                                                      • Figure 20: New sales of pension annuities versus income drawdown plans, 2005-10
                                                                                                    • … although more suited to those with large pension pots
                                                                                                      • Figure 21: Average pension annuity versus income drawdown premiums, 2005-10
                                                                                                    • Most annuitants fail to exercise their OMO right
                                                                                                      • Figure 22: Proportional distribution of external and internal sales of pension annuity and income drawdown products, 2010
                                                                                                    • Factors behind the low level of external annuity sales
                                                                                                    • Market SWOT Analysis

                                                                                                        • Figure 23: UK annuities market – SWOT analysis, 2011
                                                                                                    • Who’s Innovating?

                                                                                                      • Key points
                                                                                                        • Development of non-conventional products
                                                                                                          • Next-generation fixed-term products
                                                                                                            • Recent reforms reinvigorate the retirement income market
                                                                                                            • Market Size and Forecast

                                                                                                              • Key points
                                                                                                                • Volume sales of pension annuities fell in 2010
                                                                                                                  • Figure 24: New pension annuity business – number of new contracts and the value of new premiums, 2005-10
                                                                                                                • Outlook for 2011: sales will decline further
                                                                                                                  • Five-year forecast: demand will steadily pick up from 2012
                                                                                                                    • Figure 25: Volume of new pension annuity business – fan chart, 2006-16
                                                                                                                    • Figure 26: Value of new pension annuity business, at current prices – fan chart, 2006-16
                                                                                                                    • Figure 27: Forecast of new pension annuity business, at current and constant prices, 2006-16
                                                                                                                  • Long-term outlook is bright
                                                                                                                    • Forecast methodology
                                                                                                                      • Fan chart explanation
                                                                                                                      • Segment Performance

                                                                                                                        • Key points
                                                                                                                          • Three in five annuities are worth under £20,000
                                                                                                                            • Figure 28: Proportional distribution of annuities sold, by fund size, 2010
                                                                                                                          • Sales of higher-value annuities declined markedly in 2010
                                                                                                                            • Figure 29: Number of annuities sold, by size of fund, 2006-10
                                                                                                                          • Non-conventional annuities continue to grow their share of the market
                                                                                                                            • Figure 30: Breakdown of pension annuity sales, by main product type, 2005, 2009-10
                                                                                                                          • Enhanced annuity market continues to grow
                                                                                                                            • Figure 31: Number of new enhanced/impaired life annuity contracts and as a percentage of total annuities sold, 2005-10
                                                                                                                        • Market Share

                                                                                                                          • Key points
                                                                                                                            • Provider rankings: Aviva moves into pole position
                                                                                                                              • Figure 32: Top 15 providers in the UK annuity market, by new APE premiums, 2007
                                                                                                                            • Top five responsible for three fifths of new business in 2010
                                                                                                                              • Figure 33: Top five providers’ share of the UK annuity market, by new business (APE), 2010
                                                                                                                          • Companies and Products

                                                                                                                              • Aviva
                                                                                                                                • Prudential
                                                                                                                                  • Legal & General
                                                                                                                                    • Canada Life
                                                                                                                                      • Just Retirement
                                                                                                                                      • Brand Communication and Promotion

                                                                                                                                        • Key points
                                                                                                                                          • Above-the-line adspend is low relative to new business premiums
                                                                                                                                            • Figure 34: Above-the-line consumer advertising expenditure on annuities and income drawdown products, 2007-11
                                                                                                                                          • Aviva invests the most in annuity adspend
                                                                                                                                            • Figure 35: Top six advertisers of annuities and income drawdown products, 2009-11
                                                                                                                                          • The press and direct mail accounts for the majority of adspend
                                                                                                                                            • Figure 36: Advertising expenditure on annuities and income drawdown products, by media type, 2009-11
                                                                                                                                          • A note on adspend
                                                                                                                                          • Channels to Market

                                                                                                                                            • Key points
                                                                                                                                              • IFAs saw their distribution share edge back up to 63% in 2010
                                                                                                                                                  • Figure 37: New pension annuity premiums, by sales channel, 2006-10
                                                                                                                                                • Direct sales are practically non-existent in the drawdown market
                                                                                                                                                  • Figure 38: New income drawdown premiums, by sales channel, 2006-10
                                                                                                                                              • Ownership of Pensions, Investments and Savings

                                                                                                                                                • Key points
                                                                                                                                                  • Survey background
                                                                                                                                                    • Some 8 million people have a DC pension
                                                                                                                                                        • Figure 39: Ownership of pensions, investments and savings, by working status, June 2011
                                                                                                                                                      • Gender gap in pension provision
                                                                                                                                                        • Figure 40: Ownership of pensions, investments and savings, by gender and socio-economic status, June 2011
                                                                                                                                                      • Pension ownership is very low among the under-35s
                                                                                                                                                        • Figure 41: Ownership of pensions, investments and savings, by age, June 2011
                                                                                                                                                    • Expected Retirement Date

                                                                                                                                                      • Key points
                                                                                                                                                        • One in five people age 55-64 expect to work on post-state pension age
                                                                                                                                                            • Figure 42: When planning to retire, by age, June 2011
                                                                                                                                                          • Pension savers are more likely to retire at or before state pension age
                                                                                                                                                            • Figure 43: When planning to retire, by pension ownership, June 2011
                                                                                                                                                            • Figure 44: When planning to retire – pension savers versus non-pension savers only, June 2011
                                                                                                                                                        • Decumulation Plans

                                                                                                                                                          • Key points
                                                                                                                                                            • At least one in four DC pension savers have not thought what they will eventually do with their pension fund
                                                                                                                                                                • Figure 45: Income options planning to take or consider at retirement by DC pension savers, by gender and age, June 2011
                                                                                                                                                              • Wealthier pension savers are more likely to consider the alternatives
                                                                                                                                                                • Figure 46: Retirement income options planning to take or consider (DC pension savers only), by gross annual household income, June 2011
                                                                                                                                                            • Appendix – Market Forecast

                                                                                                                                                                • Figure 47: Best and worst case forecasts for volume of annuity business, 2011-16
                                                                                                                                                                • Figure 48: Best and worst case forecasts for value of pension annuity business, 2011-16
                                                                                                                                                            • Appendix – Ownership of Pensions by Demographics

                                                                                                                                                                • Figure 49: Ownership of private pensions, by product type and demographics, June 2011
                                                                                                                                                            • Appendix – Profile of Annuity Targets

                                                                                                                                                                • Figure 50: Profile of total sample versus annuity targets, by demographics, June 2011
                                                                                                                                                            • Appendix – Expected Retirement Date by Demographics

                                                                                                                                                                • Figure 51: When planning to retire, by demographics, June 2011

                                                                                                                                                            Companies Covered

                                                                                                                                                            • Aegon UK
                                                                                                                                                            • Age UK
                                                                                                                                                            • Association of British Insurers
                                                                                                                                                            • Aviva Plc
                                                                                                                                                            • AXA Wealth
                                                                                                                                                            • Canada Life Limited
                                                                                                                                                            • Financial Services Authority (The)
                                                                                                                                                            • Friends Provident plc
                                                                                                                                                            • GlaxosmithKline
                                                                                                                                                            • GlaxoSmithKline Plc
                                                                                                                                                            • Hargreaves Lansdown Plc
                                                                                                                                                            • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                                            • HM Revenue & Customs
                                                                                                                                                            • International Monetary Fund
                                                                                                                                                            • Legal & General Group PLC
                                                                                                                                                            • Liverpool Victoria Friendly Society Limited
                                                                                                                                                            • Lloyds Banking Group
                                                                                                                                                            • LV=
                                                                                                                                                            • MetLife, Inc.
                                                                                                                                                            • MGM Assurance
                                                                                                                                                            • National Association of Pension Funds
                                                                                                                                                            • National Savings & Investments
                                                                                                                                                            • Openwork
                                                                                                                                                            • Permira Advisers Ltd
                                                                                                                                                            • Prudential Financial, Inc
                                                                                                                                                            • Reliance Mutual
                                                                                                                                                            • Saga Services (finance)
                                                                                                                                                            • Scottish Widows Investment Partnership Ltd
                                                                                                                                                            • Standard Life Assurance Company
                                                                                                                                                            • Suffolk Life
                                                                                                                                                            • Swiss Re
                                                                                                                                                            • Windsor Life Assurance Co Ltd
                                                                                                                                                            • Zurich Financial Services

                                                                                                                                                            Annuities - UK - August 2011

                                                                                                                                                            £1,995.00 (Excl.Tax)