Annuities and income drawdown enjoyed bumper growth in 2023, which has largely continued throughout 2024. Annuities in particular have benefited from favourable conditions, as higher interest rates and therefore gilt yields have driven up annuity rates, making them a more attractive proposition.
However, understanding of retirement income options remains poor. Two fifths of DC pension holders aged two in five aged 35+ don’t know the difference between annuities and income drawdown. This knowledge gap is a hinderance to considered retirement planning, and can lead to unsuitable choices at retirement.
90% think pension providers should communicate product terms better. As well as highlighting the need for better understanding, this presents an opportunity for providers to connect with pension savers before retirement. Brands can use more regular contact to improve understanding and encourage savers to take a keener interest in their retirement saving and planning journey.
This report looks at the following areas:
- The impact of the cost of living crisis and rise in interest rates on retirement income products, including pension annuities and income drawdown.
- Analysis of annuities and income drawdown markets, including forecasts for the next five years.
- Understand key features consumers want from a retirement income product, showing how demand for guaranteed incomes has risen in recent years..
- Explore consumer attitudes towards retirement planning, revealing key issues like the knowledge gap among DC pension savers.
- Analysis of key competitive strategies.
Favourable rates have driven a rise in demand for annuities, though income drawdown is the most common retirement income solution. Providers still need to address significant knowledge gaps.
Saltanat Kuermannal, Financial Services Analyst
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EXECUTIVE SUMMARY
- Opportunities for the retirement income market
- Redefine retirement planning as a continuous journey with regular communication
- Improved education and understanding is needed to increase engagement
- Recent memories of high inflation offer an opportunity for escalating annuities
- Market dynamics and outlook
- Retirement income market predictions
- Pension annuity market size & forecast
- Annuity sales are expected to increase steadily over the next five years
- Income drawdown market size & forecast
- Income drawdown is also set for sustained, if modest, growth
- Significant increase in external annuities and advised sales
- Graph 1: annuity sales, by sales channels (ABI members only), 2019-23
- Graph 2: annuities, internal vs external sales, (ABI members only), 2019-23
- What consumers want and why
- DC pension holders accessing their funds are most likely to have withdrawn it as cash
- Around half of over-55s with a DC pension have accessed a pot
- Graph 3: proportion of over-55s who have accessed their DC pension pot(s), by method, 2024
- Advisers are the preferred source for retirement income information
- Guaranteed income is the most appealing feature
- Nine in ten value shopping around when choosing a retirement income plan
- Innovation and marketing
- Aviva launches its new Shariah lifestyle investment strategy
- Legal & General enhances retirement options with new digital guidance for DC savers
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MARKET DYNAMICS
- Market size
- Sustained growth in the retirement income market
- Graph 4: number of new pension annuity and income drawdown sales (ABI members only), 2020-24
- Pension annuity sales are expected to remain robust in 2024
- Income drawdown sales are also poised for continued growth in 2024
- Drawdown dominates the market despite the recent surge in annuity sales
- Graph 5: number of new drawdown sales (comparison of ABI and FCA data), 2019-23
- Market forecast
- Pension annuity sales are expected to increase steadily over the next five years
- Annuities will continue to benefit from helpful rates but there is a need for greater education
- Income drawdown is also set for sustained, if modest, growth…
- …and will remain the dominant retirement income solution
- Market segmentation
- Escalating annuity sales experienced the largest growth among all annuity types in 2022/23…
- …but account for less than a fifth of total sales
- Graph 6: breakdown of annuity sales (level vs escalating), 2019-23
- Single annuities remain the most common type of policy
- Graph 7: breakdown of annuity sales (single vs joint), 2019-23
- SIPP sales increase, but market share declines
- Market share
- A concentrated annuities market
- Legal and General leads the open market annuities sector
- 2023 was a good year all round for annuity providers
- Distribution channels
- Continued expansion in external annuity sales
- Graph 8: annuities, internal vs. external sales, (ABI members only), 2019-23
- Significant increase in sales of advised annuities
- Graph 9: annuity sales, by sales channels (ABI members only), 2019-23
- Advised drawdown sales remain fairly stable
- Graph 10: income drawdown sales, by channel (ABI members only), 2019-23
- Market drivers
- Most newly-accessed DC pots are fully withdrawn…
- Graph 11: number of DC pension pots accessed for the first time, by method of access, 2018/19-2023/24
- …especially among those with small pots
- Graph 12: number of DC pension pots accessed for the first time, by pot size and method, 2023/24
- High gilt yields boost the appeal of annuities
- Graph 13: monthly 10-year gilt yields, 2009-24
- Financial wellbeing and confidence remain fragile
- Graph 14: financial confidence index, 2020-24
- Graph 15: financial wellbeing index, 2020-24
- The changing age structure of the UK’s population
- Graph 16: population, by age, 2004-64
- Regulatory and legislative changes
- Annuities set to benefit from LTA abolition and Inheritance Tax liabilities
- FCA proposes a new value for money framework for workplace DC pension schemes
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WHAT CONSUMERS WANT AND WHY
- Pension ownership
- Two thirds have a workplace pension
- Graph 17: pension ownership – NET, by type, 2024
- Pension contribution peaks between 25 and 54
- Graph 18: proportion of adults who are currently making contributions to their pension pot(s), by age, pension holders and total
- Managing multiple pots is a growing challenge
- Graph 19: number of pension pots held, 2024
- Pension access
- Around half of DC pension holders aged 55+ have accessed their pot
- Graph 20: proportion of over-55s who have accessed their DC pension pot(s), by method, 2024
- Demand for annuities rises with age
- Graph 21: proportion of over-55s who have accessed their DC pension pot(s) – NET, by age, 2024
- Nearly a fifth have fully accessed their DC pension savings…
- Graph 22: amount of DC pension pots accessed by pension holders aged 55+, 2024
- Preferred sources of retirement income information
- Advisers are the preferred source for retirement income information
- Graph 23: preferred sources of information to aid decision-making around DC pensions, 2024
- Address cost concerns to improve uptake of advice
- Empower DC pension savers to make informed decisions via multi-channel engagement
- Most important product features
- Demand for a guaranteed lifetime income has risen in recent years
- Graph 24: most important features of a retirement income product, 2024
- Recent memories of high inflation offer an opportunity for escalating annuities
- Hybrid solutions have huge appeal in theory
- A need to close the knowledge gap
- Attitudes towards retirement planning
- Strong demand for hybrid retirement income products
- Graph 25: attitudes towards retirement planning, 2024
- Redefine retirement planning as a continuous journey with regular communication
- Confidence in retirement income decision-making drops significantly among financially vulnerable groups
- Graph 26: agreement with the statement “I feel confident making decisions about my retirement income,” by financial situation, 2024
- Prevent regret with proactive support
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INNOVATION AND MARKETING TRENDS
- Market developments
- Legal & General leading the UK Pension Risk Transfer market
- Major pension buy-ins signal growing demand for de-risking solutions and enhanced member security
- Launch activity and innovation
- Canada Life first provider to sign up to Origo annuity tracking service
- Aviva launches its new Shariah lifestyle investment strategy
- Legal & General enhances retirement options with new digital guidance for DC savers
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APPENDIX
- Supplementary data
- Market size: underlying data
- Breakdown of sales: internal versus external
- Pension annuity sales by channel
- Income drawdown sales by channel
- Market forecast data and methodology
- Market forecast: underlying data
- Annuities market forecast and prediction intervals (volume)
- Income drawdown market forecast and prediction intervals (volume)
- Forecast methodology
- Report scope and definitions
- Report scope
- Product definitions: annuity and fixed term retirement plan
- Product definitions: pension drawdown and UFPLS
- Abbreviations and terms
- Consumer research methodology
- TURF analysis – methodology data
- Nielsen Ad Intel coverage
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