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Investment Bonds - UK - January 2009

After two years of positive growth in new investment bond sales, things have taken a turn for the worse in 2008 with both the number of new contracts and value of new premiums declining substantially. Changes in the UK’s capital gains tax regime have been particularly detrimental to the market’s competitive position relative to other asset classes, while the current global economic crisis has certainly not done anything to help matters. There have been a few bright spots for investment bonds, with the with-profits segment of the market actually registering positive sales figures, while sales of bonds offering guarantees have naturally benefited from consumers’ need for certainty and security.

Due to their very specific tax advantages, which for the most part mainly benefit only high net worth individuals, and the fact that they are primarily sold via IFAs, investment bonds appeal to a very narrow target market. In fact, according to consumer research, only a small portion of the population are aware of the product’s existence, while even fewer actually report ownership of a policy. On a brighter note, there is some reason to believe that the rapidly ageing and increasingly affluent UK population could result in an expansion in the potential key market.

This report examines the key issues facing the investment bond market, ranging from demographic and economic influences to the potential impact of changes in the regulatory environment and competing investment products. The Market Size section details changes in each segment of the investment bond market, while the report also identifies the key players and their performance. Finally, consumer research highlights attitudes and behaviour towards long term investing.

Key report themes:

  • The global economic crisis has damaged investor confidence in virtually all higher-risk asset classes.

  • A flight to safety has, however, benefited some segments of the investment bond market where capital protection is offered.

  • The changes in the CGT regime have damaged the competitive position of investment bonds.

  • With the recent failure of the AIG premium bond resulting in significant investors’ losses, bad press has again damaged the integrity of the market.

  • The continually evolving regulatory environment, which includes the RDR (Retail Distribution Review) and TCF (‘Treating Customers Fairly’), is likely to change the way investment bonds will be sold in the future.

  • Wider demographic and economic trends indicate that the potential target market of investment bondholders is likely to expand over the coming years.

  • Whether the industry is able to take advantage of this, however, will depend on how the UK tax system continues to evolve.

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Table of contents

  1. Issues in the Market

      • Key issues
        • Market background and definitions
          • Investment risk
            • Figure 1: Risk profile of selected savings and investments
          • A cautionary note about the term ‘bond’
            • Investment bonds from life offices
              • The smoothing effect of with-profits bonds
                • Market Value Reduction (MVR)
                  • Closed Funds
                    • Taxation
                      • Tax-related concepts and products
                        • Abbreviations
                        • Future Opportunities

                          • Long term gains of greater transparency
                            • My Life, My Legacy
                              • Greater support for intermediaries will help identify future clients
                                • Internet should be utilised more to promote and educate
                                • Market in Brief

                                  • Overall sales dive in 2008
                                    • Figure 2: Total number of new single-premium investment bond contracts and value of new premiums, 2002-08
                                  • Preference for safety in 2008
                                    • Figure 3: Proportional distribution of investment bond sales by main product type, based on new premiums, 2008*
                                  • Demographic and economic drivers
                                    • Regulatory environment has complicated things
                                      • IFAs dominate distribution
                                        • Norwich Union the new market leader
                                          • Collectives and Equity ISAs main competitors
                                            • Key consumer research findings
                                              • Investment bond ownership
                                                • Attitudes and behaviour towards financial services and advice
                                                  • Outlook on long term investing and risk tolerance
                                                  • Internal Market Environment

                                                    • Key points
                                                      • Investors influenced by global events
                                                        • Figure 4: Investor responses to wider market trends, 2008
                                                      • Industry continually haunted by past mistakes
                                                        • The with-profits’ fall from grace
                                                          • Current market conditions see the return of bonus cuts and MVRs
                                                            • The mis-selling of precipice bonds
                                                              • AIG debacle puts another blemish on the investment bond market
                                                                • Expensive and complicated charging structures problematic
                                                                  • High commissions paid to advisers could lead to mis-selling…
                                                                    • …and also squeeze margins for providers
                                                                      • Regulatory developments
                                                                        • Changes in CGT undermine investment bond competitiveness
                                                                          • …but all is not lost
                                                                            • The Retail Distribution Review
                                                                              • TCF initiative forces a revision of legacy business
                                                                                • Efforts to make with-profits more transparent
                                                                                  • MiFID’s positive impact
                                                                                  • Broader Market Environment

                                                                                    • Key points
                                                                                      • Demographic trends will expand the key target market
                                                                                        • Figure 5: UK population, by age band, 2008-13
                                                                                      • Inheritances could boost investment bond new business
                                                                                        • Increasing number of higher rate taxpayers
                                                                                          • Figure 6: Number of basic and higher rate taxpayers, 1999-2000-2008-09
                                                                                        • Finding funds to invest will be difficult for many
                                                                                          • Investment bonds and stock market performance
                                                                                            • Figure 7: FTSE 100 and FTSE All Share – daily index movements, December 2000-December 2008
                                                                                          • Falling base rate could help boost demand for investment bonds
                                                                                            • Figure 8: Changes in the bank base interest rate, January 1999-January 2009
                                                                                          • The base rate and Investment bonds
                                                                                            • Inflationary pressures
                                                                                            • Consumer Context

                                                                                              • Key points
                                                                                                • Savings and investment moving up the agenda
                                                                                                  • Figure 9: Savings, investment, borrowing and debt repayment – consumers’ expected activity, September 2007-September 2008
                                                                                                • Affluent and wealthy to be most financially active
                                                                                                  • Figure 10: Expected financial activity, by socio-demographic and income groups, September 2008 and average for the last 26 quarters
                                                                                                • Mixed bag for life and pension providers
                                                                                                  • Figure 11: Intended life and pensions* activity Q3/Q4 2002-Q3/Q4 2008
                                                                                                • Investor sentiment remains weak
                                                                                                  • Figure 12: Intended purchases of shares and equity-based unit trusts, government and corporate bonds and bond-based unit trusts and sales of equities and unit trusts, Q3/Q4 2002-Q3/Q4 2008
                                                                                                • Cash-based saving intentions rise but could fall along with inflation
                                                                                                  • Figure 13: Intended cash-based activities, Q3/Q4 2002-Q3/Q4 2008
                                                                                              • Competitive Context

                                                                                                • Key points
                                                                                                  • Collective investment funds are the main competitor
                                                                                                      • Figure 14: Retail sales of unit trusts and OEICs by IMA members, 1998-2008
                                                                                                    • Stocks and shares ISAs are the competing wrap
                                                                                                      • Figure 15: ISA sales, by type of ISA, 2003/04-20007/08
                                                                                                    • NS&I savings products have benefited from the flight to safety
                                                                                                      • Figure 16: Amounts invested in NS&I annually and total funds held, 2003/04-2007/08
                                                                                                    • British passion for property a substitute for more traditional investments
                                                                                                      • New buy-to-let market business suffers in 2008
                                                                                                        • Figure 17: New buy-to-let business, 2003-08 (Q3)
                                                                                                    • Strengths and Weaknesses in the Market

                                                                                                        • Figure 18: Investment bonds – SWOT analysis, 2009
                                                                                                    • Who’s Innovating?

                                                                                                      • Key points
                                                                                                        • Zurich offers advisers a tax wrapper comparison tool
                                                                                                          • Friends Provident bond introduces a ‘Multi-income option’
                                                                                                            • Volatility influences launch of AEGON ‘Investment Control’ bond
                                                                                                              • RDR likely to stoke innovation in adviser remuneration
                                                                                                              • Trade Perspective

                                                                                                                  • Market development
                                                                                                                    • Impact of CGT changes
                                                                                                                      • The impact of the RDR
                                                                                                                        • Trends in distribution
                                                                                                                          • Are with-profits bonds making a come back?
                                                                                                                            • The story behind the new money market investment bond category
                                                                                                                              • Offshore investment bond business
                                                                                                                                • Will the greying of the population have a positive impact on the market?
                                                                                                                                  • Investment bond outlook for 2009 and beyond
                                                                                                                                  • Market Size and Forecast

                                                                                                                                    • Key points
                                                                                                                                      • Overall sales take a dive in 2008
                                                                                                                                        • Figure 19: Total number of new single-premium investment bond contracts and value of new premiums, 2002-08
                                                                                                                                      • More difficult times ahead
                                                                                                                                        • Forecast
                                                                                                                                          • Figure 20: Forecast of the total number of new single-premium investment bond contracts and value of new premiums, 2003-13
                                                                                                                                        • Factors incorporated
                                                                                                                                        • Market Segmentation

                                                                                                                                          • Key points
                                                                                                                                            • Note on data in this section:
                                                                                                                                              • Preference for safety in 2008
                                                                                                                                                • Figure 21: Proportional distribution of investment bond sales by main product type, based on new premiums, 2003-08**
                                                                                                                                              • With-profits segment performs surprisingly well
                                                                                                                                                • Figure 22: New with-profits bond sales, 2002-08
                                                                                                                                              • Sharp drop in distribution bond sales
                                                                                                                                                • Figure 23: New distribution bond sales, 2002-08
                                                                                                                                              • Money Market investment bonds command high average premiums
                                                                                                                                                • Figure 24: Money market bond new sales, 2008
                                                                                                                                              • Unit-linked bonds look less attractive at the moment
                                                                                                                                                • Figure 25: New unit-linked bond sales, 2008
                                                                                                                                              • Guaranteed bonds getting more attention
                                                                                                                                                • Figure 26: New guaranteed equity bond sales, 2008
                                                                                                                                            • Market Share

                                                                                                                                              • Key points
                                                                                                                                                • Norwich Union takes the top spot as Halifax Life drops out
                                                                                                                                                  • Figure 27: Top ten investment bond providers by new premium income from single-premium life policies, 2005-07
                                                                                                                                                • Top providers of unit-linked bonds
                                                                                                                                                  • Figure 28: Top ten unit-linked bond providers by new premium income from single-premium unit-linked life policies, 2005-07
                                                                                                                                              • Companies and Products

                                                                                                                                                • Key points
                                                                                                                                                  • Prospects for top investment bond providers
                                                                                                                                                    • Prudential and NU lead the With Profits revival
                                                                                                                                                      • Several providers pulling back commissions to advisors
                                                                                                                                                        • American providers looking to buy their way into the market
                                                                                                                                                        • Brand Communication and Promotion

                                                                                                                                                          • Key points
                                                                                                                                                            • Seven percent of investment related adspend is in the bond category
                                                                                                                                                              • Figure 29: Total advertising expenditure on investments, by sub-category, year to November 2004-08
                                                                                                                                                            • Bond adspend focused on press and direct mail in 2008
                                                                                                                                                              • Figure 30: Advertising expenditure on bonds, by media type, year to November 2007-08
                                                                                                                                                            • Prudential and NU move up the bond adspend table in 2008
                                                                                                                                                              • Figure 31: Top ten bond advertisers, year to November 2004-08
                                                                                                                                                          • Channels to Market

                                                                                                                                                            • Key points
                                                                                                                                                              • IFAs dominate distribution
                                                                                                                                                                • Figure 32: Investment bond distribution mix based on new premiums, 2004-08
                                                                                                                                                              • Distribution channels by investment bond type
                                                                                                                                                                • Figure 33: Investment bond distribution mix, by bond type, based on new premiums, 2008
                                                                                                                                                              • Fund supermarkets increasingly used in the distribution of investments
                                                                                                                                                              • The Consumer – Product Ownership

                                                                                                                                                                • Key points
                                                                                                                                                                  • Investment bonds appeal to a niche market
                                                                                                                                                                      • Figure 34: Ownership of savings and investment products, by type, December 2008
                                                                                                                                                                    • Bond policyholders likely to be experienced investors
                                                                                                                                                                      • Figure 35: Cross analysis of ownership, by selected type of savings/investment product
                                                                                                                                                                    • Those approaching retirement will find bond policies attractive
                                                                                                                                                                      • Figure 36: Ownership of select savings and investment products, by gender, age, marital status, and lifestage, December 2008
                                                                                                                                                                    • Investment bonds also appeal to higher rate tax payers
                                                                                                                                                                      • Figure 37: Ownership of select savings and investment products, by socio-economic group, working status, gross annual household income and ACORN group, December 2008
                                                                                                                                                                    • Investment ownership and media and technology usage
                                                                                                                                                                      • Figure 38: Ownership of select savings and investment products, by newspaper readership, technology usage, internet usage frequency and web usage, December 2008
                                                                                                                                                                  • The Consumer – Attitudes and Behaviour towards Financial Services and Advice

                                                                                                                                                                    • Key points
                                                                                                                                                                      • Nearly half of respondents like to do their own research
                                                                                                                                                                          • Figure 39: Agreement with select statements toward financial services
                                                                                                                                                                        • Owners of more complex products more likely to consult an IFA
                                                                                                                                                                          • Figure 40: Product ownership by agreement with select statements toward financial services
                                                                                                                                                                        • People nearing retirement more likely to rely on advice
                                                                                                                                                                          • Figure 41: Agreement with select statements towards financial services by gender, age, marital status, and lifestage, December 2008
                                                                                                                                                                        • Affluent doing more of their own research but also rely on advice
                                                                                                                                                                          • Figure 42: Agreement with select statements toward financial services by socio-economic group, working status, gross annual household income and ACORN group, December 2008
                                                                                                                                                                      • The Consumer – Attitudes and Behaviour toward Long Term Investing

                                                                                                                                                                        • Key points
                                                                                                                                                                          • A third of consumers agree it is important to save for the long term
                                                                                                                                                                              • Figure 43: Agreement with statements about longer-term finances, December 2008
                                                                                                                                                                            • Awareness of investment bonds highest for those nearing retirement
                                                                                                                                                                              • Figure 44: Agreement with statements about longer-term finances by gender, age, marital status, and lifestage, December 2008
                                                                                                                                                                            • People investing in collectives may find bonds attractive as they near retirement
                                                                                                                                                                              • Affluent most conscious of the value of long term saving
                                                                                                                                                                                • Figure 45: Agreement with statements about longer-term finances, by socio-economic group, working status, gross annual household income and ACORN group, December 2008
                                                                                                                                                                              • Broadsheet readers more confident and active investors
                                                                                                                                                                                • Figure 46: Agreement with statements about longer-term finances by newspaper readership, technology usage, internet usage frequency and web usage, December 2008
                                                                                                                                                                            • The Consumer – Investment Goals and Risk Tolerance

                                                                                                                                                                              • Key points
                                                                                                                                                                                • Britons prefer familiar products and have little tolerance for risk
                                                                                                                                                                                  • Figure 47: Agreement with statements about saving and investing, December 2008
                                                                                                                                                                                • Investment bondholder attitudes similar to equity based investors
                                                                                                                                                                                  • Figure 48: Agreement with statements about saving and investing, by select product ownership
                                                                                                                                                                                • Regular income a key attraction
                                                                                                                                                                                  • Older investors require investments to generate a regular income
                                                                                                                                                                                    • Figure 49: Agreement with statements about saving and investing, by gender, age, marital status, and lifestage, December 2008
                                                                                                                                                                                  • Data indicate the wealthy may be sensing an opportunity in equities
                                                                                                                                                                                    • Figure 50: Agreement with statements about saving and investing, by socio-economic group, working status, gross annual household income and ACORN group, December 2008
                                                                                                                                                                                  • Broadsheet readers and daily internet users more ready to face risk
                                                                                                                                                                                    • Figure 51: Agreement with statements about saving and investing, by newspaper readership, technology usage, internet usage frequency and web usage, December 2008
                                                                                                                                                                                • The Consumer – Further Analysis

                                                                                                                                                                                  • Key points
                                                                                                                                                                                    • Primary investment target groups are older and well off
                                                                                                                                                                                      • Figure 52: Target groups identified for selected savings/investment products
                                                                                                                                                                                    • Repertoire analysis
                                                                                                                                                                                      • A third of adults have three or more savings or investment products
                                                                                                                                                                                        • Figure 53: Number of savings and investment product types held
                                                                                                                                                                                      • Ownership increases among sophisticated investors
                                                                                                                                                                                        • Figure 54: Savings and investment product types by number of products held
                                                                                                                                                                                      • More evidence of cross-selling opportunities
                                                                                                                                                                                        • Wealthy most likely to hold multiple investment products
                                                                                                                                                                                          • Figure 55: Number of savings and investment product types held, by gender, age and socio-economic groups, lifestage and gross annual household income
                                                                                                                                                                                        • Key target groups
                                                                                                                                                                                          • Figure 56: Key target groups for investment products
                                                                                                                                                                                        • Safety First (26% of sample)
                                                                                                                                                                                          • Uninterested (58% of the sample)
                                                                                                                                                                                            • Ready and Capable (15% of the sample)
                                                                                                                                                                                              • Ready and Capable show higher than average ownership of bonds
                                                                                                                                                                                                • Figure 57: Ownership of savings and investment products, by key target groups
                                                                                                                                                                                              • Half of the Ready and Capable group hold 5 or more products
                                                                                                                                                                                                • Figure 58: Number of savings and investment product types held, by key target groups
                                                                                                                                                                                              • Wealthy belong to the Ready and Capable group
                                                                                                                                                                                                • Figure 59: Cluster demos by gender, age and socio-economic groups, lifestage and gross annual household income
                                                                                                                                                                                            • Appendix – Broader Market Environment

                                                                                                                                                                                                • Figure 60: Projected socio-demographic composition of United Kingdom population, 2003-13
                                                                                                                                                                                                • Figure 61: Monthly changes in annual inflation rates* for RPI and CPI – UK, December 2001-December 2008

                                                                                                                                                                                            Companies Covered

                                                                                                                                                                                            • Aegon UK
                                                                                                                                                                                            • Alliance & Leicester
                                                                                                                                                                                            • American Express UK
                                                                                                                                                                                            • Association of British Insurers
                                                                                                                                                                                            • Aviva Plc
                                                                                                                                                                                            • AXA UK plc
                                                                                                                                                                                            • Bank of England
                                                                                                                                                                                            • Barclays Bank plc
                                                                                                                                                                                            • Co-operative Group
                                                                                                                                                                                            • Debt Management Office (DMO)
                                                                                                                                                                                            • Financial Ombudsman Service
                                                                                                                                                                                            • Financial Services Authority (The)
                                                                                                                                                                                            • Friends Provident plc
                                                                                                                                                                                            • Gfk NOP
                                                                                                                                                                                            • Government Actuary's Department (GAD)
                                                                                                                                                                                            • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                                                                            • HSBC Private Bank (UK) Limited
                                                                                                                                                                                            • Investment Management Association
                                                                                                                                                                                            • Legal & General Assurance Society Limited
                                                                                                                                                                                            • Lehman Brothers [UK]
                                                                                                                                                                                            • Lloyds Banking Group
                                                                                                                                                                                            • MetLife Investors Insurance
                                                                                                                                                                                            • NatWest
                                                                                                                                                                                            • Norwich Union
                                                                                                                                                                                            • Office for National Statistics
                                                                                                                                                                                            • Prudential plc
                                                                                                                                                                                            • Scottish Friendly Assurance Society Ltd
                                                                                                                                                                                            • Scottish Mutual
                                                                                                                                                                                            • Skandia UK
                                                                                                                                                                                            • Threadneedle Investment Services Ltd
                                                                                                                                                                                            • Winterthur Life UK Limited

                                                                                                                                                                                            Investment Bonds - UK - January 2009

                                                                                                                                                                                            US $2,672.70 (Excl.Tax)