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Annuities and Income Drawdown - UK - August 2019

Covered in this report

This report examines the UK market for annuities and income drawdown which are aimed at DC pension savers.

Under current legislation, DC pension holders can access their pension savings from the age of 55 and have the freedom to choose how and when they draw on it. They can take up to 25% of their pension tax-free and then choose how they draw the rest, which will be subject to income tax above the marginal rate.

“The changes brought about by Pension Freedoms legislation have been so significant that regulators and providers are still adjusting to them just over five years since first being announced in the 2014 Budget. Although there have been few major innovations in the market, product development activity could increase in the coming years now that a firmer regulatory framework is finally coming into place.”
– George Zaborowski, Senior Financial Services Analyst

This report looks at the following areas:

  • Pension Freedoms went too far too quickly
  • Most have given up on professional advice just when they need it most

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Table of contents

  1. Overview

    • What you need to know
      • Products covered in this Report
      • Executive Summary

          • The market
            • Drawdown sales continue to significantly outpace annuities
              • Figure 1: Forecast of new retirement income sales – fan chart, 2014-24
            • Half of pension pots accessed are fully withdrawn
              • Figure 2: Number of DC pension pots accessed for the first time, by usage, April 2016-March 2018
            • Enhanced annuities account for two fifths of new annuity sales
              • Auto-enrolment has expanded the target market
                • New FCA rules will start to be implemented from autumn 2019
                  • Companies and brands
                    • Lack of competition in the annuity market
                      • More firms competing in the drawdown market
                        • The consumer
                          • Two thirds now have a pension
                            • Figure 3: Ownership of single and multiple pension pots, June 2019
                          • Half of over-55s have already accessed their pension savings
                            • Figure 4: Proportion of DC pension holders aged 55+ who have accessed pension pot, June 2019
                          • One in five expect to access pension savings before state pension age
                            • Figure 5: When DC pension holders expect to access their pension (under-65s only), June 2019
                          • Those yet to retire more drawn to concept of an annuity than drawdown
                            • Figure 6: Decumulation options likely to consider, June 2019
                          • At least half are unprepared about how pension pot will be used in retirement
                            • Figure 7: Level of planning about use of pension savings in retirement, June 2019
                          • More than half claim to be very or somewhat confident about managing pension
                            • Figure 8: Level of confidence about making decision about pension savings, June 2019
                          • Uncertainty is the key driver of pension concerns
                            • Figure 9: Concerns about the use of pension pot, June 2019
                          • Control and flexibility are vital but doubts about engagement remain
                            • Figure 10: Agreement with statements about pensions and retirement income, June 2019
                          • What we think
                          • Issues and Insights

                            • Pension Freedoms went too far too quickly
                              • The facts
                                • The implications
                                  • Most have given up on professional advice just when they need it most
                                    • The facts
                                      • The implications
                                      • The Market – What You Need to Know

                                        • Drawdown sales continue to eclipse annuities
                                          • Half of pension pots accessed are fully withdrawn
                                            • Enhanced annuities now account for two in five new annuity sales
                                              • Half of annuities are sold on the open market
                                                • Auto-enrolment has helped to expand the addressable market
                                                  • New FCA rules will come into force in autumn 2019
                                                  • Market Size and Forecast

                                                    • Drawdown sales continue their impressive growth
                                                      • Figure 11: Volume of new annuity and income drawdown sales, 2014-18
                                                    • Drawdown estimated to make up 84% of the market by value
                                                      • Figure 12: Value of new annuity and income drawdown premiums, 2014-18
                                                    • Retirement income product sales set to continue rising
                                                      • Figure 13: Forecast of new retirement income sales – fan chart, 2014-24
                                                      • Figure 14: Forecast of new retirement income sales – fan chart, 2014-24
                                                    • New premiums forecast to reach £43 billion in 2024
                                                      • Figure 15: Forecast of new retirement income premiums – fan chart, 2014-24
                                                      • Figure 16: Forecast of new retirement income premiums, 2014-24
                                                    • Forecast methodology
                                                    • Pension Pots Accessed

                                                      • Over half of pension plans accessed are fully withdrawn
                                                        • Figure 17: Number of DC pension pots accessed for the first time, by usage, April 2016-March 2018
                                                      • Full withdrawals concentrated among pots valued under £30,000
                                                        • Figure 18: Proportional distribution of pension pots accessed, by pot size and usage, October 2017-March 2018
                                                      • Higher number of modest pension pots now entering drawdown
                                                        • Most accessing pension are under 65
                                                          • Figure 19: Proportional distribution of pension pots accessed, by customer age and usage, October 2017-March 2018
                                                        • £25.6 billion withdrawn from pensions since start of Pension Freedoms
                                                          • Figure 20: Flexible payments from pensions, Q2 2015-Q1 2019
                                                      • Annuity Market Segmentation

                                                        • Enhanced annuities now account for two fifths of sales
                                                          • Figure 21: Annuity sales, by product type, 2016-18
                                                      • Channels to Market

                                                        • Half of annuity sales made on the open market
                                                          • Figure 22: Breakdown of annuity and income drawdown sales, by internal and external channels, 2014-18
                                                        • Most annuities sold without advice
                                                          • Figure 23: Number of new annuity sales, by channel, 2014-18
                                                        • Around half of drawdown business goes via IFAs
                                                          • Figure 24: Number of new drawdown sales, by channel, 2014-18
                                                        • Intermediary definitions
                                                        • Market Drivers

                                                          • In-force DC pension scheme numbers surpass 26 million in 2017
                                                            • Figure 25: Number of individual and group pensions in force and number of occupational DC members, 2013-17
                                                          • 10.1 million workers have been auto-enrolled
                                                            • Brexit uncertainty continues to supress annuity rates
                                                              • Trend of working into old age will boost demand for flexible solutions
                                                              • Regulatory and Legislative Changes

                                                                • FCA reveals final rules after Retirement Outcomes Review consultation
                                                                  • ‘Wake-up’ packs
                                                                    • Annuity information prompt
                                                                      • More clarity around the cost of drawdown
                                                                        • FCA sets out Final Rules on Pension Investment Pathways
                                                                          • Early versions of Pensions Dashboards due to be launched soon
                                                                          • Companies and Brands – What You Need to Know

                                                                            • Deficient level of competition in the annuity market
                                                                              • More competition exists in drawdown market
                                                                                • Product development focused on flexibility and retirement planning
                                                                                • Key Players and Market Movers

                                                                                  • Over 50 firms offer retirement income products
                                                                                    • The top annuity providers
                                                                                      • Recent sales figures
                                                                                        • Figure 26: New annuity business, by the largest providers, 2018
                                                                                      • There are just six providers offering annuities on the open market
                                                                                        • More companies are active in the income drawdown market
                                                                                        • Competitive Strategies and Innovation

                                                                                          • Control and flexibility are key drivers for product development
                                                                                            • Just Group launches flexible annuity called Secure Lifetime Income
                                                                                              • Smart Pension and L&G unveil prototype of retirement income solution
                                                                                                • Canada Life launches Diversified Monthly Income Fund
                                                                                                  • AJ Bell introduces two income funds
                                                                                                    • Automation expected to improve access to personalised advice
                                                                                                    • The Consumer – What You Need to Know

                                                                                                      • Two thirds now have a pension
                                                                                                        • Most plan to access DC pension at state pension age or later
                                                                                                          • Annuities more likely to be considered as an option than drawdown
                                                                                                            • At least half are unprepared about use of pension pot in retirement
                                                                                                              • Uncertainty is the key driver of pension concerns
                                                                                                                • Control and flexibility are key but questions about engagement remain
                                                                                                                • Pension Ownership and Access

                                                                                                                  • Most full-time workers own a pension
                                                                                                                    • Many savers hold multiple pension pots
                                                                                                                      • Figure 27: Ownership of single and multiple pension pots, June 2019
                                                                                                                    • More people say they have a DB pension than a DC one
                                                                                                                      • Figure 28: Type of pension owned, by number of pension pots, June 2019
                                                                                                                    • Nearly half of DC pension holders have multiple pots
                                                                                                                      • Figure 29: Proportion of pension savers with a single pot versus two or more pots, by type of pension, June 2019
                                                                                                                    • Half of over-55s have accessed their pension savings
                                                                                                                      • Figure 30: Proportion of DC pension holders aged 55+ who have accessed pension pot, June 2019
                                                                                                                  • Age Expecting to Access Pension

                                                                                                                    • Most expect to access DC savings at state pension age or later
                                                                                                                      • Figure 31: When DC pension holders expect to access their pension (under-65s only), June 2019
                                                                                                                    • A notable minority plan to delay access after state pension age
                                                                                                                    • Decumulation Options Likely to Consider

                                                                                                                      • Annuities remain more appealing than drawdown
                                                                                                                        • Figure 32: Decumulation options likely to consider, June 2019
                                                                                                                      • Partial cash withdrawal still the single most likely option considered
                                                                                                                        • Pension Freedoms mean people have the option to vary their approach
                                                                                                                        • Planning for Use of Pension in Retirement

                                                                                                                          • Half yet to consider or unsure about use of pension pots in retirement
                                                                                                                            • Figure 33: Level of planning about use of pension savings in retirement, June 2019
                                                                                                                          • Many a decade or less away from state retirement are unprepared
                                                                                                                            • 55% are confident about managing their pension
                                                                                                                              • Figure 34: Level of confidence about making decision about pension savings, June 2019
                                                                                                                          • Concerns about Use of Pensions in Retirement

                                                                                                                            • Uncertainty is the key driver of pension concerns
                                                                                                                              • Figure 35: Concerns about the use of pension pot, June 2019
                                                                                                                            • Most have multiple concerns
                                                                                                                              • Figure 36: Repertoire analysis on concerns about the use of pension pot, June 2019
                                                                                                                              • Figure 37: Concerns about the use of pension pot, by number of concerns held, June 2019
                                                                                                                            • Few are concerned about access to professional advice
                                                                                                                              • Failing to improve access to advice regulators have shifted their focus
                                                                                                                              • Attitudes and Expectations about Retirement Income

                                                                                                                                • A secure income for life is what everybody wants…
                                                                                                                                  • Figure 38: Agreement with statements about pensions and retirement income, June 2019
                                                                                                                                • …but control and flexibility are also top priorities
                                                                                                                                  • One in five admit that planning for retirement isn’t a priority for them
                                                                                                                                  • Appendix – Data Sources, Abbreviations and Supporting Information

                                                                                                                                      • Abbreviations
                                                                                                                                        • Consumer research methodology
                                                                                                                                        • Appendix – Market Size and Forecast

                                                                                                                                          • Total market forecasts – best- and worst-case scenarios
                                                                                                                                            • Figure 39: Forecast of new retirement income sales – best- and worst-case scenarios, 2019-24
                                                                                                                                            • Figure 40: Forecast of new retirement income premiums – best- and worst-case scenarios, 2019-24
                                                                                                                                          • Forecast methodology

                                                                                                                                          Annuities and Income Drawdown - UK - August 2019

                                                                                                                                          £1,995.00 (Excl.Tax)