Retirement Income Solutions - UK - August 2016
“The retirement income market has changed dramatically since 2014, with mixed fortunes for annuities and income drawdown products. Despite a huge contraction in new annuity sales, it’s clear that retirees still want a predictable and guaranteed income in retirement, and this could see hybrid and blended products come to prominence in the market. The UK’s vote to leave the EU has added further complexity for those heading towards retirement as annuity rates have fallen sharply in the weeks following the vote. This is likely to result in more people delaying their retirement income plans until more certainty prevails and will also provide a boost to the income drawdown sector of the market.”
– Scott McDonald, Financial Services Analyst
This report examines the following issues:
- Consumers take a conservative approach to pension withdrawals
- Pension Wise popularity has increased, but need for tailored advice will see growth in robo-advice
This report examines the retirement income market, with a focus on annuity and income drawdown products. The report looks at the changes in the market following the introduction of pension freedoms, how businesses have responded to these changes and the key players in the market. Mintel’s consumer research also reviews consumer ownership of pension products, and their attitudes towards planning for retirement and advice. The report also considers how consumers intend to take money from their pension fund and what they are considering spending this money on. Finally, the report looks into consumers’ awareness of pension freedoms and what features of retirement income products appeal to them.
For the purposes of this Report, Mintel has used the following definitions:
Annuities are an insurance product that allows a consumer to purchase a guaranteed income for life with a pension fund. Prior to April 2015 buying an annuity was the only option available to many retirees, but this is no longer the case following the introduction of pension freedoms. Once a consumer has purchased an annuity it is not possible to cancel this policy, however, the government have been consulted on the creation of a second hand annuity market to allow consumers to sell their annuities.
Enhanced Annuities work in the same way as a standard annuity, by offering a retiree an income for life. But, enhanced annuities are only available to retirees that meet certain criteria typically those that have a pre-existing medical condition or smoke or drink heavily. Many enhanced annuities work on the basis that due to pre-existing medical conditions, or a consumer’s lifestyle, they will not have to pay out for as long, and insurers then compensate consumers for this fact by increasing the consumer’s income.
Hybrid & Blended products allow a consumer to have both an annuity and income drawdown product, resulting in consumers having some guarantees over their income, but also allowing their pension fund to continue to grow. Hybrid products allow a consumer to purchase a packaged product from a retirement income provider, but may mean that both products may not be the best option available to a consumer, whereas blended products allows consumers to purchase both products, but from different providers. This allows a consumer to select products that meet their needs, but may result in multiple fees and charges being incurred. Income Drawdown is an alternative method of drawing pension funds, this method allowing a retiree to leave their pension fund invested and withdraw lump sums from their pension as and when they wish to. As the pension fund is still invested there is a possibility that the fund can increase or decrease depending on what investments the fund is invested in. The first 25% that is taken from a pension fund is tax free, any further withdrawals are subject to income tax.
Uncrystallised Fund Pension Lump Sum (UFPLS) is another way that retirees are able to withdraw their pension funds. This method works much in the same way that income drawdown does, but it does not require a consumer to move their pension fund to an income drawdown provider. Pension funds remains with a pension provider and cash withdrawals can be made from this fund, subject to the same tax implications outlined for income drawdown. Not all pension providers will allow their members to withdraw their pension funds as UFPLS.
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