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Annuities - UK - August 2013

“The pensions landscape is changing. Older people are set to work for longer and delay their annuity purchase and younger people are facing a future of inadequate pension savings. Increased flexibility as well as more education and advice around annuity products – particularly non-standard annuity products – is required in order to better equip consumers to make annuity decisions.”

– Stephanie Absolom, Financial Services Analyst

Some questions answered in this report include:

  • Is more education needed on the different types of annuity?
  • Will we see more over-65s working to fund their retirement?
  • Do non-traditional retirement funding plans pose a risk to the annuity market?
  • To what extent are people realistic about their retirement income expectations?
  • What role does the adviser have to play in the annuity market going forward?

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Table of contents

  1. Introduction

      • Report scope
        • Abbreviations
        • Executive Summary

            • The market
              • New annuity premiums increased by 25% in 2012
                • Figure 1: Value of new pension annuity business, at current prices, 2008-18
              • Intermediaries play an important role in the annuity market
                • Figure 2: New pension annuity premiums, by sales channel, 2007-12
              • Market factors
                • Increased longevity requires changes in attitudes towards retirement
                  • Figure 3: Expectations of life at 65, 1981-2058
                • Increase in pension age population projected over next 40 years
                  • Living for longer means working for longer for many
                    • Around 4 million over-45s are potential annuitants
                      • Annuity rates remain low but show some signs of improvement
                        • Figure 4: Annuity rates and gilt yields, January 1991-July 2013
                      • QE sees has negatively impacted pension pay-outs…
                        • … which has increased interest in enhanced annuities
                          • Stockmarket improvements could peak interest in investment-linked annuities
                            • Figure 5: FTSE 100 and FTSE All Share – monthly index movements, January 2004-June 2013
                          • Auto-enrolment is set to have a long-term impact on annuities
                            • The impact of regulation continues to shape the annuity market
                              • Income drawdown market is dwarfed by the annuity market
                                • Companies, products and innovations
                                  • The annuity market is dominated by 5 big players
                                    • Figure 6: Top 5 providers in the UK annuity market, by new APE premiums, 2012
                                  • Flexibility introduced to Just Retirement’s fixed-term annuity
                                    • Tesco looks to test the waters in the booming annuity market
                                      • Not-for-profit service launched to help advisers work with the OMO
                                        • The consumer
                                          • Just over a quarter of over-45s are potential annuitants
                                            • Figure 7: Savings and Investment Ownership, June 2013
                                          • Some 53% of over-45s will use a personal pension to fund their retirement
                                            • Figure 8: Retirement funding plans, June 2013
                                          • IFAs and financial planners will continue to play an important role in annuity selection
                                            • Figure 9: Annuity research preferences, June 2013
                                          • Flexibility in retirement income ranks high for nearly a third of non-retired over-45s
                                            • Figure 10: Attitudes towards annuities, June 2013
                                          • What we think
                                          • Issues in the Market

                                              • Is more education needed on the different types of annuity?
                                                • Will we see more over-65s working to fund their retirement?
                                                  • Do non-traditional retirement funding plans pose a risk to the annuity market?
                                                    • To what extent are people realistic about their retirement income expectations?
                                                      • What role does the adviser have to play in the annuity market going forward?
                                                      • Trend Application

                                                        • Working past 65 is good for the health and the pocket
                                                          • Expertise is in demand in the annuity market
                                                            • Taking care of the elderly could be mutually beneficial
                                                            • Market Drivers

                                                              • Key points
                                                                • Increased longevity places pressure on annuities
                                                                  • Figure 11: Expectations of life at 65, 1981-2058
                                                                • A 30% increase in the number of people turning 65 in 2012
                                                                  • Figure 12: Projected size of the UK population, by age band, 2012-56
                                                                • Just over a quarter of non-retired over-45s hold a DC pension
                                                                  • Increase in the number of over-65s working
                                                                    • Annuity rates show some signs of improvement
                                                                      • Figure 13: Annuity rates and gilt yields, January 1991-July 2013
                                                                    • Stockmarket improvements boost interest in investment-linked annuities
                                                                      • Figure 14: FTSE 100 and FTSE All Share – monthly index movements, January 2004-June 2013
                                                                    • Auto-enrolment is set to have a long-term impact on annuities
                                                                    • Regulatory Environment

                                                                      • Key points
                                                                        • ABI Code of Conduct designed to build consumer confidence
                                                                          • External annuity sales continue to increase
                                                                            • Figure 15: Share of external versus internal new pension annuity sales, 2001-12
                                                                          • Gender Directive set to mean that women receive higher annuity rates
                                                                            • Solvency II impact expected to be limited
                                                                              • RDR could reduce number of advised sales
                                                                                • FCA looks to investigate annuity market
                                                                                • Income Drawdown Overview

                                                                                  • Key points
                                                                                    • Income drawdown market is dwarfed by the annuity market
                                                                                      • Figure 16: New sales of pension annuities versus income drawdown plans, 2007-12
                                                                                    • External sales dominate in the drawdown market
                                                                                      • Figure 17: Proportional distribution of external and internal sales of pension annuity and income drawdown products, 2012
                                                                                    • IFAs are even more dominant in the income drawdown market
                                                                                      • Figure 18: New pension income drawdown premiums, by sales channel, 2008-12
                                                                                  • SWOT Analysis

                                                                                      • Figure 19: SWOT Analysis for the annuities market, August 2013
                                                                                  • Who’s Innovating?

                                                                                    • Key points
                                                                                      • Just Retirement introduces flexibility to its fixed-term annuity product
                                                                                        • Tesco launches annuity comparison service
                                                                                          • Annuity quotation portal launched by iPipeline
                                                                                            • Wrap platform Nucleus launches annuity portal
                                                                                              • Annuity lead generation tool launched
                                                                                              • Market Size and Forecast

                                                                                                • Key points
                                                                                                  • Annuity business strengthens in 2012
                                                                                                    • Figure 20: New pension annuity business – number of new contracts and the value of new premiums, 2007-12
                                                                                                  • The value of new annuity business is set to continue to rise
                                                                                                    • Figure 21: Value of new pension annuity business, at current prices, 2008-18
                                                                                                    • Figure 22: Value of new pension annuity business, at current prices, 2008-18
                                                                                                  • The number of new annuity contracts is also expected to grow
                                                                                                    • Figure 23: Volume of new pension annuity business, 2008-18
                                                                                                    • Figure 24: Volume of new pension annuity business, 2008-18
                                                                                                  • Forecast methodology
                                                                                                  • Segment Performance

                                                                                                    • Key points
                                                                                                      • Small pension pots account for the bulk of annuity sales
                                                                                                        • Figure 25: Proportional distribution of annuities sold, by fund size, 2012
                                                                                                      • Mid-sized fund growth continues to prevail
                                                                                                        • Figure 26: Number of annuities sold, by size of fund, 2007-12
                                                                                                      • Investment and enhanced annuities grow in popularity
                                                                                                        • Figure 27: Breakdown of pension annuity sales, by main product type, 2010-12
                                                                                                      • Enhanced annuities sales reach record levels in 2012
                                                                                                        • Figure 28: Number of new enhanced/impaired life annuity contracts and as a percentage of total annuities sold, 2009-12
                                                                                                    • Market Share

                                                                                                      • Key points
                                                                                                        • Aviva remains the top annuity provider by new APE premiums
                                                                                                          • Figure 29: Top 15 providers in the UK annuity market, by new APE premiums, 2011-12
                                                                                                      • Companies and Products

                                                                                                        • Aviva
                                                                                                          • Company description
                                                                                                            • Product range
                                                                                                              • Distribution
                                                                                                                • Key data
                                                                                                                  • Recent activity
                                                                                                                    • Prudential
                                                                                                                      • Company description
                                                                                                                        • Product range
                                                                                                                          • Distribution
                                                                                                                            • Key data
                                                                                                                              • Recent activity
                                                                                                                                • Legal & General
                                                                                                                                  • Company description
                                                                                                                                    • Product range
                                                                                                                                      • Distribution
                                                                                                                                        • Key data
                                                                                                                                          • Recent activity
                                                                                                                                            • Partnership Assurance (Cinven Ltd)
                                                                                                                                              • Company description
                                                                                                                                                • Product range
                                                                                                                                                  • Distribution
                                                                                                                                                    • Key data
                                                                                                                                                      • Recent activity
                                                                                                                                                        • Just Retirement (Avallux Sarl)
                                                                                                                                                          • Company description
                                                                                                                                                            • Product range
                                                                                                                                                              • Distribution
                                                                                                                                                                • Key data
                                                                                                                                                                  • Recent activity
                                                                                                                                                                  • Brand Communication and Promotion

                                                                                                                                                                    • Key points
                                                                                                                                                                      • An active annuity market isn’t reflected in falling adspend
                                                                                                                                                                        • Figure 30: Above-the-line consumer advertising expenditure on annuities and income drawdown products, 2011-13
                                                                                                                                                                      • Aviva is the top advertiser of annuity and income drawdown products
                                                                                                                                                                        • Figure 31: Top six advertisers of annuities and income drawdown products, 2011-13
                                                                                                                                                                      • Large increase in press adspend as providers push the OMO message
                                                                                                                                                                        • Figure 32: Advertising expenditure on annuities and income drawdown products, by media type, 2011-13
                                                                                                                                                                      • A note on adspend
                                                                                                                                                                      • Channels to Market

                                                                                                                                                                        • Key points
                                                                                                                                                                          • Non-advised annuity sales account for 62% of new contracts in Q1 2013
                                                                                                                                                                            • Figure 33: Volume and value of annuity sales using new ABI reporting format, Q1 2013
                                                                                                                                                                          • New annuity premium distribution dominated by IFAs
                                                                                                                                                                            • Figure 34: New pension annuity premiums, by sales channel, 2007-12
                                                                                                                                                                          • Advisers expected to retain role in Post-RDR market
                                                                                                                                                                            • Distribution of income drawdown
                                                                                                                                                                            • Savings and Investment Ownership

                                                                                                                                                                              • Key points
                                                                                                                                                                                • Just over a quarter of those aged 45+ are potential annuitants
                                                                                                                                                                                  • Figure 35: Savings and Investment Ownership, June 2013
                                                                                                                                                                                • Potential annuitants more likely to be financially savvy
                                                                                                                                                                                  • DC pension holders spread their risk amongst other savings products
                                                                                                                                                                                    • Figure 36: Savings and investment ownership, by most popular savings and investment ownership, June 2013
                                                                                                                                                                                • Retirement Funding Plans

                                                                                                                                                                                  • Key points
                                                                                                                                                                                    • Over-45s are expecting their pensions to support them through retirement
                                                                                                                                                                                      • Figure 37: Retirement funding plans, June 2013
                                                                                                                                                                                    • 8% expect to use equity in home to boost retirement finances
                                                                                                                                                                                      • Consumers with one type of retirement funding plan are set to rely on state pension
                                                                                                                                                                                        • Figure 38: Repertoire of retirement funding plans, June 2013
                                                                                                                                                                                      • Multiple retirement funding strategies reduce the dependency on annuity income
                                                                                                                                                                                        • Figure 39: Savings and investment ownership, by repertoire of retirement funding plans, June 2013
                                                                                                                                                                                      • Employment in retirement is a preferred choice for some
                                                                                                                                                                                        • Figure 40: Savings and investment ownership, by selected retirement funding plans, June 2013
                                                                                                                                                                                      • Older people more likely to fund retirement through some form of work
                                                                                                                                                                                        • Figure 41: Plans to fund retirement through some form of employment, by age
                                                                                                                                                                                    • Annuity Research Options

                                                                                                                                                                                      • Key points
                                                                                                                                                                                        • Professional advice proves popular for potential annuitants
                                                                                                                                                                                          • Figure 42: Annuity research preferences, June 2013
                                                                                                                                                                                        • Only a minority expect that they will not research annuity options
                                                                                                                                                                                          • Women are less likely to seek professional annuity advice
                                                                                                                                                                                            • Figure 43: Annuity research preferences, by gender, June 2013
                                                                                                                                                                                        • Attitudes Towards Annuities

                                                                                                                                                                                          • Key points
                                                                                                                                                                                            • Flexibility is key for those looking for a retirement income
                                                                                                                                                                                              • Figure 44: Attitudes towards annuities, June 2013
                                                                                                                                                                                            • Lack of awareness over enhanced annuity products
                                                                                                                                                                                              • Advice seekers and online researchers looking for flexible products
                                                                                                                                                                                                • Figure 45: Attitudes towards annuities, by annuity research preferences, June 2013
                                                                                                                                                                                            • Appendix – Market Size

                                                                                                                                                                                                • Figure 46: Value of new pension annuity business, 2013-18
                                                                                                                                                                                                • Figure 47: Volume of new pension annuity business, 2013-18
                                                                                                                                                                                            • Appendix – Savings and Investment Ownership

                                                                                                                                                                                                • Figure 48: Most popular savings and investment ownership, by demographics, June 2013
                                                                                                                                                                                                • Figure 49: Next most popular savings and investment ownership, by demographics, June 2013
                                                                                                                                                                                                • Figure 50: Other savings and investment ownership, by demographics, June 2013
                                                                                                                                                                                            • Appendix – Retirement Funding Plans

                                                                                                                                                                                                • Figure 51: Most popular retirement funding plans, by demographics, June 2013
                                                                                                                                                                                                • Figure 52: Next most popular retirement funding plans, by demographics, June 2013
                                                                                                                                                                                                • Figure 53: Repertoire of retirement funding plans, by demographics, June 2013
                                                                                                                                                                                            • Appendix – Annuity Research Options

                                                                                                                                                                                                • Figure 54: Annuity research preferences, by demographics, June 2013
                                                                                                                                                                                            • Appendix – Attitudes Towards Annuities

                                                                                                                                                                                                • Figure 55: Attitudes towards annuities, by demographics, June 2013
                                                                                                                                                                                            • Appendix – Market Background and Product Definitions

                                                                                                                                                                                                • Figure 56: Overview of the annuity and retirement income market, 2012
                                                                                                                                                                                              • Single and joint life policies
                                                                                                                                                                                                • The Open Market Option
                                                                                                                                                                                                  • The ABI Code of Conduct
                                                                                                                                                                                                    • Alternative Solutions

                                                                                                                                                                                                    Companies Covered

                                                                                                                                                                                                    To learn more about the companies covered in this report please contact us.

                                                                                                                                                                                                    Annuities - UK - August 2013

                                                                                                                                                                                                    US $2,583.33 (Excl.Tax)