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Investment Bonds - UK - February 2010

This report looks in detail at the investment bonds market, both from a market and consumer perspective.

  • The investment bond market was badly hit by the bursting of the dot com bubble in the early noughties and has been in perpetual decline ever since - in 2002, over a million new policies were sold, three times more than the number sold in 2009.
  • In addition, the changes to CGT introduced in April 2008 made investment bonds far less attractive to investors from a tax perspective - accordingly, in 2008, total new premiums fell by 39%, from £38.6 billion in 2007 to £23.6 billion.
  • As a result of the changes to CGT, many advisers now believe that collective investments represent a better overall proposition to investors, although investment bonds will always serve a purpose due to their unique structure and their use in tax deferment and IHT planning.
  • Mintel forecasts that, in value terms, the investment bond market won’t return to growth until 2011, while in 2010 (due to the slow recovery expected in the UK this year, the recent bear market, and a squeeze on consumer’s real earnings), total new premiums are expected to fall by 20%.
  • According to Mintel's consumer research, investment bonds are owned by just 7% of UK adults compared with 14% who own company shares or collective investments and two-thirds that have a cash-based savings account.
  • Investment bonds are a niche product aimed predominantly at mass affluent consumers. Indeed, Mintel's consumer research shows that people with at least £50,000 of investible assets are almost five times more likely to own investment bonds compared with the national average (31% ownership, versus 7%).
  • Unfortunately for providers, Mintel's consumer research shows that just 8% of UK adults are classed as mass affluent (ie have at least £50,000 of investible assets).

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Table of contents

  1. Issues in the Market

      • Key issues
        • The scope of this report
          • Market background and definitions
            • Investment risk
              • Figure 1: Risk profile of selected savings and investments
            • Investment bonds from life offices
              • The smoothing effect of with-profits bonds
                • Market Value Reductions (MVRs)
                  • Closed Funds
                    • Taxation
                      • Abbreviations
                      • Future Opportunities

                        • Investors shift their focus towards capital growth
                          • Rebuilding trust in a market which has been suffering
                          • Market in Brief

                            • Total new premiums fell substantially in 2008 and 2009
                              • Figure 2: Total number of new single-premium investment bond contracts and value of total new premiums, 2004-09
                            • Unit-linked bonds are the biggest product category
                              • Figure 3: Proportional distribution of investment bond sales by main product categories, based on total new premiums, 2005-09
                            • A sector that has been plagued by problems
                              • The recovery in global stock markets is good news for providers
                                • Collectives are the main alternative to an investment bond
                                  • Figure 4: Retail sales of unit trusts and OEICs by IMA members, 2000-09*
                                • AXA/Winterthur was the market leader in 2008
                                  • Figure 5: Top ten investment bond providers, by new premium income from single-premium life policies, 2006-08
                                • Investment bonds are typically sold through IFAs
                                  • Figure 6: Investment bond distribution mix, based on total new premiums, 2008-09
                                • A niche product that targets mass affluent consumers
                                  • Figure 7: Savings and investment products held, by value of investible assets, December 2009
                              • Internal Market Environment

                                • Key points
                                  • The influence of the stock market on investment bonds
                                    • The fall from grace of the with-profits concept
                                      • The collapse of AIG’s cash fund shook investor confidence
                                        • The recent return of MVRs may have deterred investors
                                          • High commissions put a question mark over impartial advice
                                            • The complexity of the product is also a key issue
                                              • The tax position of investment bonds is now less favourable…
                                                • … but they are beneficial in a number of situations
                                                  • Regulatory developments
                                                    • The Retail Distribution Review
                                                      • Treating Customers Fairly
                                                        • Improving the transparency of with-profits funds
                                                        • Broader Market Environment

                                                          • Key points
                                                            • An ageing population is good news for investment bond providers
                                                              • Figure 8: UK population, by age band, 2009-14
                                                            • Inheritances received in later life may also be relevant
                                                              • A product aimed predominantly at higher-rate tax payers
                                                                • Figure 9: Number of basic and higher rate taxpayers, 2000/01-2009/10
                                                              • The outlook for PDI and consumer savings looks good
                                                                • The stock market rally continues
                                                                  • Figure 10: FTSE 100 and FTSE All Share – daily index movements, January 2002-September 2009
                                                                • The base rate remains at an all-time low
                                                                  • Figure 11: Changes in the Bank of England base rate, January 2002-July 2009
                                                              • Consumer Context

                                                                • Key points
                                                                  • Consumer confidence has increased since Q1 2009…
                                                                    • Figure 12: Consumer confidence index, January 1997-December 2009
                                                                  • … with savings and investment activity rising as a result
                                                                    • Figure 13: Savings, investment, borrowing and debt repayment – consumers’ expected activity, December 2008-December 2009
                                                                  • Investment in equities is also expected to increase
                                                                    • Figure 14: Intended buy and sell activity of stockmarket-based investments and government/corporate bonds, Q3/Q4 2002-Q4 2008/Q1 2009
                                                                • Competitive Context

                                                                  • Key points
                                                                    • Investors are increasingly drawn to collectives…
                                                                      • Figure 15: Retail sales of unit trusts and OEICs by IMA members, 2000-09*
                                                                    • … with sales of unit trusts and OEICs increasing sharply in 2009
                                                                      • Equity ISA subscriptions are expected to increase in 2009/10
                                                                        • Figure 16: ISA sales, by type of ISA, 2003/04-2008/09
                                                                      • Buy-to-let is a popular alternative investment
                                                                        • Figure 17: New buy-to-let mortgage business, 2003-09
                                                                    • SWOT Analysis

                                                                        • Figure 18: Investment bonds – SWOT analysis, 2010
                                                                    • Who’s Innovating?

                                                                      • Key points
                                                                        • A mature sector that lacks innovation
                                                                          • Enhancing the attractiveness of existing propositions
                                                                            • A number of new products have been launched…
                                                                              • … including offshore investment bonds…
                                                                                • … and structured products from banks and building societies
                                                                                  • The RDR is likely to prompt more innovation in the market
                                                                                  • Market Size and Forecast

                                                                                    • Key points
                                                                                      • Sales of investment bonds have been declining for some time…
                                                                                        • Figure 19: Total number of new single-premium investment bond contracts and value of total new premiums, 2004-09
                                                                                      • … with average premiums also having started to fall recently
                                                                                        • Market forecast
                                                                                          • Total new premiums are expected to grow in 2011
                                                                                            • Figure 20: Forecast of the total number of new single-premium investment bond contracts and value of total new premiums, 2004-14
                                                                                          • In volume terms, the market will continue to shrink
                                                                                            • Factors used in this forecast
                                                                                            • Market Segmentation

                                                                                              • Key points
                                                                                                • Bond classifications altered
                                                                                                  • Unit-linked bonds are the biggest product category
                                                                                                    • Figure 21: Proportional distribution of investment bond sales by main product categories, based on total new premiums, 2005-09
                                                                                                  • Investors sought safety in 2008 when stock markets were falling
                                                                                                    • With-profits bonds became unpopular after the dot com crash
                                                                                                      • Figure 22: New with-profits bond sales, 2008-09
                                                                                                    • Distribution bond sales declined in 2009
                                                                                                      • Figure 23: New distribution bond sales, 2008-09
                                                                                                    • Money market bonds were very popular at the top end in 2008
                                                                                                      • Figure 24: New money market bond sales, 2008-09
                                                                                                    • Unit-linked bonds are a better performing sector of the market
                                                                                                      • Figure 25: New unit-linked bond sales, 2008-09
                                                                                                    • Guaranteed bonds are primarily defensive
                                                                                                      • Figure 26: New guaranteed bond sales, 2008-09
                                                                                                    • Structured products – a replacement for investment bonds?
                                                                                                    • Market Share

                                                                                                      • Key points
                                                                                                        • AXA/Winterthur overtook Aviva to become the market leader in 2008
                                                                                                          • Figure 27: Top ten investment bond providers, by new premium income from single-premium life policies, 2006-08
                                                                                                        • HSBC saw a massive increase in sales in 2008
                                                                                                          • Figure 28: Top ten unit-linked bond providers, by new premium income from single-premium unit-linked life policies, 2006-08
                                                                                                        • Aviva dominates the with-profits sector
                                                                                                          • Figure 29: New sales of with-profits bonds, by top five providers, H1 2008-H1 2009
                                                                                                      • Companies and Products

                                                                                                        • Aviva (formerly Norwich Union)
                                                                                                          • Legal & General
                                                                                                              • Figure 30: Legal & General: New single premiums gross of reinsurance, 2007-08 and H1 2008-H1 2009
                                                                                                            • Standard Life
                                                                                                              • Sterling (Zurich)
                                                                                                                • AXA
                                                                                                                  • Prudential
                                                                                                                  • Brand Communication and Promotion

                                                                                                                    • Key points
                                                                                                                      • Investment bond adspend has fallen over the last four years
                                                                                                                        • Figure 31: Total advertising expenditure on investments, by sub-category, year to September 2006-09
                                                                                                                      • The top ten advertisers account for 87% of total adspend
                                                                                                                        • Figure 32: Top ten investment bond advertisers, year to September 2006-09
                                                                                                                      • Providers favour direct mail as their main way of advertising
                                                                                                                        • Figure 33: Advertising expenditure on investment bonds, by media type, year to September 2008-09
                                                                                                                    • Channels to Market

                                                                                                                      • Key points
                                                                                                                        • Sales of investment bonds are almost exclusively intermediated…
                                                                                                                          • Figure 34: Investment bond distribution mix, based on total new premiums, 2008 and 2009
                                                                                                                        • …but demand from IFAs fell considerably in 2009
                                                                                                                          • Figure 35: Investment bond distribution mix, by product catregory, based on total new premiums, 2009*
                                                                                                                      • The Consumer: Product Ownership

                                                                                                                        • Key points
                                                                                                                          • Two thirds of consumers have cash-based savings…
                                                                                                                            • Figure 36: Ownership of savings and investment products, December 2009
                                                                                                                          • … while just 14% own shares or collective investments…
                                                                                                                            • … and just 7% have investment bonds
                                                                                                                              • Many simply can’t afford to take any risks with their cash
                                                                                                                                • Figure 37: Ownership of savings and investment products, by various demographics, December 2009
                                                                                                                              • Guaranteed bonds are more commonly held by older investors
                                                                                                                                • Figure 38: Ownership of investment bonds, by various demographics, December 2009
                                                                                                                              • A product for experienced investors
                                                                                                                                • Figure 39: Cross-holdings of different types of savings and investment products, December 2009
                                                                                                                              • People with investment bonds are more likely to own GEBs
                                                                                                                                • Most people have just a few different savings/investment products…
                                                                                                                                  • Figure 40: Repertoire of the number of different types of savings and investment products owned, December 2009
                                                                                                                                • … with older and more affluent consumers likely to own more
                                                                                                                                  • Figure 41: Repertoire of the number of different types of savings and investment products owned, December 2009
                                                                                                                                • People with a wide range of products are more likely to own IBs…
                                                                                                                                  • Figure 42: Repertoire of the number of different types of savings and investment products owned, by ownership of different types of savings and investment products, December 2009
                                                                                                                                • … and are likely to be wealthier…
                                                                                                                                  • Figure 43: Total value of saving and investments held, by number of saving/investment products held, December 2009
                                                                                                                                • … and have a much higher risk tolerance
                                                                                                                                  • Figure 44: Risk tolerance, by number of different types of savings and investment products owned December 2009
                                                                                                                              • The Consumer – Investible Assets

                                                                                                                                • Key points
                                                                                                                                  • The mass affluent are a very small target market…
                                                                                                                                    • Figure 45: Total value of savings and investments held, December 2009
                                                                                                                                  • … with HNW being even smaller, at just 1% of the population
                                                                                                                                    • Men are more likely to be at the top of the wealth scale…
                                                                                                                                      • Figure 46: Total value of savings and investments held, December 2009
                                                                                                                                    • The mass affluent are more likely to own investment bonds…
                                                                                                                                      • Figure 47: Total value of savings and investments held, by ownership of different types of savings and investment products, December 2009
                                                                                                                                    • …and also tend to have a higher risk tolerance
                                                                                                                                      • Figure 48: Total value of savings and investments held, by risk tolerance, December 2009
                                                                                                                                  • The Consumer: Risk Tolerance

                                                                                                                                    • Key points
                                                                                                                                      • The average UK consumer is extremely risk averse…
                                                                                                                                          • Figure 49: Risk tolerance, December 2009
                                                                                                                                        • Risk tolerance declines as people get older
                                                                                                                                          • Figure 50: Risk tolerance, by various demographics, December 2009
                                                                                                                                        • ABs are willing to accept a higher level of risk…
                                                                                                                                          • Investment bonds do require a slightly higher risk tolerance
                                                                                                                                            • Figure 51: Risk tolerance, by ownership of different types of savings and investment products, December 2009
                                                                                                                                        • The Consumer – Attitudes towards Investment

                                                                                                                                          • Key points
                                                                                                                                            • A fifth of people only invest in products with guaranteed returns
                                                                                                                                              • Figure 52: Attitudes towards longer-term finances, December 2009
                                                                                                                                            • Awareness of investment bonds is extremely low
                                                                                                                                              • ABs are more likely to regularly monitor their investments
                                                                                                                                                • Figure 53: Attitudes towards longer-term finances, December 2009
                                                                                                                                              • Older people prefer to invest in products with guaranteed returns
                                                                                                                                                • Figure 54: Attitudes towards longer-term finances, December 2009
                                                                                                                                              • ABC1s are more likely to that think now is a good time to invest
                                                                                                                                                • Poor past performance is more of an issue for investment bond holders
                                                                                                                                                  • Figure 55: Ownership of different types of savings and investment products, by attitudes towards longer-term finances, December 2009
                                                                                                                                                • Wealthy people are more likely to think now is a good time to invest
                                                                                                                                                  • Figure 56: Total value of savings and investments held, by attitudes towards longer-term finances, December 2009
                                                                                                                                                • Higher-risk investors have negative views on investment bonds
                                                                                                                                                  • Figure 57: Risk tolerance, by attitudes towards longer-term finances, December 2009
                                                                                                                                              • The Consumer – Target Groups

                                                                                                                                                • Key points
                                                                                                                                                  • How Mintel has created these target groups
                                                                                                                                                    • Savvy investors are more likely to own investment bonds…
                                                                                                                                                      • Figure 58: Ownership of different types of savings and investment products, by target group, December 2009
                                                                                                                                                    • … and also have the largest amount of investible assets
                                                                                                                                                      • Figure 59: Total value of savings and investments held, by target group, December 2009
                                                                                                                                                    • Risk Averse Savers are just as the name suggests
                                                                                                                                                      • Figure 60: Risk tolerance, by target group, December 2009
                                                                                                                                                    • Savvy Investors are very clued up when it comes to their finances
                                                                                                                                                      • Figure 61: Attitudes towards longer-term finances, by target group, December 2009
                                                                                                                                                    • The Unengaged are apathetic when it comes to financial planning
                                                                                                                                                      • Savvy Investors are likely to be high earners
                                                                                                                                                        • Figure 62: Target groups, by various demographics, December 2009
                                                                                                                                                    • Appendix – Internal Market Environment

                                                                                                                                                      • Treating Customers Fairly
                                                                                                                                                        • Retail Distribution Review
                                                                                                                                                          • Splitting sales and advice
                                                                                                                                                            • Figure 63: Proposed regulatory landscape, 2012
                                                                                                                                                          • From commission to fees
                                                                                                                                                            • Possible extension to non-investment markets
                                                                                                                                                            • Appendix – The Consumer

                                                                                                                                                                • Figure 64: Ownership of savings and investment products, December 2009
                                                                                                                                                                • Figure 65: Total value of savings and investments held, December 2009
                                                                                                                                                                • Figure 66: Risk tolerance, by various demographics, December 2009
                                                                                                                                                                • Figure 67: Attitudes towards longer-term finances, December 2009
                                                                                                                                                                • Figure 68: Repertoire of the number of different types of savings and investment products owned, December 2009
                                                                                                                                                                • Figure 69: Target groups, by various demographics, December 2009

                                                                                                                                                            Companies Covered

                                                                                                                                                            • Aegon UK
                                                                                                                                                            • Alliance & Leicester
                                                                                                                                                            • Asda Group Ltd
                                                                                                                                                            • Association of British Insurers
                                                                                                                                                            • Aviva Plc
                                                                                                                                                            • AXA Sun Life
                                                                                                                                                            • Bank of England
                                                                                                                                                            • Barclays Bank plc
                                                                                                                                                            • Chelsea Building Society
                                                                                                                                                            • Co-operative Group
                                                                                                                                                            • Council of Mortgage Lenders
                                                                                                                                                            • Evolve Financial Planning
                                                                                                                                                            • Financial Services Authority (The)
                                                                                                                                                            • Friends Provident plc
                                                                                                                                                            • Government Actuary's Department (GAD)
                                                                                                                                                            • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                                            • HSBC Private Bank (UK) Limited
                                                                                                                                                            • Investment Management Association
                                                                                                                                                            • Legal & General Group PLC
                                                                                                                                                            • Nationwide Building Society
                                                                                                                                                            • Norwich & Peterborough Building Society
                                                                                                                                                            • Norwich Union
                                                                                                                                                            • Prudential plc
                                                                                                                                                            • Royal Bank of Scotland Group plc
                                                                                                                                                            • Scottish Friendly Assurance Society Ltd
                                                                                                                                                            • Scottish Mutual
                                                                                                                                                            • Scottish Provident
                                                                                                                                                            • Zurich Financial Services

                                                                                                                                                            Investment Bonds - UK - February 2010

                                                                                                                                                            £1,995.00 (Excl.Tax)