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UK Annuities and Income Drawdown Market Report

Everything you need to make the right decisions

Providing the most comprehensive and up-to-date information and analysis of the Annuities and Income Drawdown market, and the behaviours, preferences and habits of the consumer.

Mintel has the answers you’re looking for

What are the key challenges facing the industry? Who is the consumer and what do they want? Where are the opportunities, where are the risks and what lies ahead?

Products 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. At age 55, DC pension savers have the option of buying an annuity (secure income), moving into flexible drawdown (variable income), and withdrawing cash in a series of lump sums or the entire amount in one go (also known as UFPLS (Uncrystallised Fund Pension Lump Sum)). It is also possible to choose a mix of these options or to leave the pension fund invested.

Product definitions are as follows:

An annuity is an insurance policy that provides a guaranteed income for life or for a predefined period. A conventional lifetime annuity provides a regular income for life while a short-term (or fixed term) annuity provides a guaranteed income for up to five years.

There are several sub-categories of annuity available on the market, including:

  • Level annuity – pays a fixed income (usually on a monthly basis) for the rest of an individual’s life, thus declining in real value due to inflation.
  • Escalating (or increasing) annuity – provides a regular income that increases either by a constant proportion each year or in line with RPI (Retail Price Index) inflation.
  • Enhanced annuity – will pay a higher amount of income than a conventional annuity to someone who has a significant impairment or health problem (eg cancer or chronic asthma) or who has a negative lifestyle factor (eg smokes or is overweight), which could reduce their lifespan.
  • Investment-linked annuity – the pension fund is invested, and thus the income paid varies according to the performance of the underlying investments. Investment-linked annuities can either be with-profits or unit-linked.

Flexible drawdown provides a variable income by allowing the pension holder to take money from their pension pot as and when they need it, while keeping the rest invested.

Uncrystallised fund pension lump sum allows pension holders to take one-off or regular cash withdrawals directly from their pension. The first 25% of each withdrawal can be made taxfree, while the remaining 75% is taxed as income at the pension holder’s marginal rate.

What you need to know

Market momentum in the retirement income market has been firmly in the direction of income drawdown for the past three years. The implementation of Pension Freedoms in combination with low annuity rates, a lack of competition in the annuity sector, and a rising stock market, have helped to boost demand for income drawdown. Whereas annuity sales significantly outnumbered income drawdown sales in 2014, the opposite is now true. Nonetheless, annuities are not on their way to extinction. Mintel research continues to show a healthy level of interest in annuities among DC (Defined Contribution) pension savers who have not yet retired.

As the income drawdown market has grown, the proportion of business generated with independent advice has plummeted. When drawdown was primarily an option for the wealthy, nearly all new business was sold through an IFA. However, the introduction of those with more modestly sized pension pots to the market has led to a notable rise in the proportion of non-advised sales. Since managing drawdown is a more complex option than buying an annuity, this has raised concerns among regulators.

This Report examines how the market for annuities and income drawdown is evolving three years on from the implementation of Pension Freedoms. It includes a comprehensive overview of each sector’s market performance, trends in distribution, and detailed information about what DC pension savers are doing when they access their pensions. Mintel’s exclusive consumer research uncovers valuable insight into what those yet to retire think about their retirement income options, what kinds of decisions they anticipate they will make, and which advice and guidance resources they use.

Expert analysis from a specialist in the field

Written by George Zaborowski, a leading analyst in the Financial Services sector, his extensive knowledge delivers in-depth commentary and analysis to highlight current trends and add expert context to the numbers.

Although the decline in annuity sales appears to have subsided, market momentum remains in favour of drawdown. DC pension savers highly value control and flexibility, and with annuity rates still historically low, many entering retirement will continue to avoid buying one until there is more incentive to do so. George Zaborowski
Senior Financial Services Analyst

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Table of contents

  1. Overview

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

          • The market
            • Demand for drawdown has climbed well ahead of annuities
              • Figure 1: Forecast of new retirement income sales – Fan chart, 2013-23
            • Small pension pots the most likely to be fully withdrawn
              • Figure 2: Number of DC pension pots accessed for the first time, split by usage, October 2015-September 2017
            • Half of annuities sold include a guaranteed period
              • Higher proportion of annuity sales completed on the open-market
                • IFA led drawdown sales have tumbled
                  • Modern retirement requires flexible income solutions
                    • FCA proposes standardised income drawdown products
                      • Companies and brands
                        • Lack of competitive pressures in the annuity market
                          • Drawdown market competition more diverse and fragmented
                            • Significant innovation yet to come
                              • The consumer
                                • Pension ownership
                                  • Figure 3: Ownership of single and multiple pension pots, June 2018
                                • Half of those aged 55+ have already accessed their pension savings
                                  • Figure 4: Proportion of DC pension holders aged 55+ who have accessed pension pot, June 2018
                                • 19% anticipate they will access their pension before state retirement age
                                  • Figure 5: When DC pension holders expect to access their pension (under-65s only), June 2018
                                • An annuity is a more appealing concept than drawdown for those yet to retire
                                  • Figure 6: Decumulation options likely to consider, June 2018
                                • 74% find the various retirement income options confusing
                                  • Figure 7: Agreement with statements about retirement income options, June 2018
                                • Pension savers will seek advice and guidance but do not want to pay for it
                                  • Figure 8: Sources of retirement income advice and guidance, June 2018
                                • What we think
                                • Issues and Insights

                                  • Should access to independent advice be facilitated via the workplace?
                                    • The facts
                                      • The implications
                                        • Market dynamics will eventually turn back in the favour of annuities
                                          • The facts
                                            • The implications
                                            • The Market – What You Need to Know

                                              • Drawdown sales volumes have blasted ahead of annuities
                                                • Lower value pension pots the most likely to be fully withdrawn
                                                  • Half of all annuity sales are with a guaranteed period
                                                    • The proportion of IFA led drawdown sales has plummeted
                                                      • Modern retirement requires a more flexible approach
                                                        • FCA proposes standardised income drawdown options
                                                        • Market Size and Forecast

                                                          • Drawdown sales continue to surge ahead of annuities
                                                            • Figure 9: Volume of new annuity and income drawdown sales, 2013-17
                                                          • Drawdown was worth an estimated 83% of the market in 2017
                                                            • Figure 10: Value of new annuity and income drawdown premiums, 2013-17
                                                          • Sales volumes expected to be relatively flat in the next five years…
                                                            • Figure 11: Forecast of new retirement income sales – Fan chart, 2013-23
                                                            • Figure 12: Forecast of new retirement income sales, 2013-23
                                                          • …while premiums are projected to reach £32 billion in 2023
                                                            • Figure 13: Forecast of new retirement income premiums – Fan chart, 2013-23
                                                            • Figure 14: Forecast of new retirement income premiums, 2013-23
                                                          • Forecast methodology
                                                          • Pension Pots Accessed

                                                            • Over half of pension pots accessed are fully withdrawn
                                                              • Figure 15: Number of DC pension pots accessed for the first time, by usage, October 2015-September 2017
                                                            • Full withdrawals primarily executed by those with pots under £30,000
                                                              • Figure 16: Proportional distribution of customers by pot size and usage, April-September 2017
                                                            • Desire for flexibility making drawdown more common
                                                              • Over-65s more likely to buy an annuity
                                                                • Figure 17: Proportion distribution of customers by age and usage, April-September 2017
                                                              • £17.5 billion withdrawn from pensions since start of Pension Freedoms
                                                                • Figure 18: Flexible payments from pensions, Q2 2015-Q1 2018
                                                            • Annuity Market Segmentation

                                                              • Annuities with a guaranteed period account for half all sales
                                                                • Figure 19: Annuity sales by product type, 2015-17
                                                              • Number of flexible annuity sales nearly doubles
                                                              • Channels to Market

                                                                • Over half of annuities sold externally while opposite true for drawdown
                                                                  • Figure 20: Breakdown of annuity and income drawdown sales by internal and external, 2014-17
                                                                • Large majority of annuities sold without advice
                                                                  • Figure 21: Number of new annuity sales, by channel, 2014-17
                                                                • Drawdown sales via IFAs have dwindled since 2015
                                                                  • Figure 22: Number of new drawdown sales, by channel, 2014-17
                                                                • Intermediary definitions
                                                                • Market Drivers

                                                                  • In-force DC pension scheme numbers move beyond 23 million in 2016
                                                                    • Figure 23: Number of individual and group pensions in force and number of occupational DC members, 2012-16
                                                                  • Thus far 9.7 million workers have been auto-enrolled
                                                                    • Historically low annuity rates increase appeal of income drawdown
                                                                      • Fewer providers offering annuities on the open market
                                                                        • Proportion working beyond state pension age on the rise
                                                                        • Regulatory and Legislative Changes

                                                                          • FCA Retirement Outcomes Review final report
                                                                            • Lack of market competition detrimental to non-advised consumers
                                                                              • Key proposals require providers to bear more responsibility
                                                                                • Providers must inform annuity customers of better deals
                                                                                  • Launch of Pension’s Dashboard facing delays
                                                                                    • Single Financial Guidance Body receives go-ahead
                                                                                      • Pension Advice Allowance has thus far been ineffective
                                                                                        • Calls to raise employer-arranged pension advice exemption
                                                                                        • Companies and Brands – What You Need to Know

                                                                                          • Lack of competitive pressures in the annuity market
                                                                                            • The number of providers selling on the open market falls further
                                                                                              • Drawdown market competition more diverse and fragmented
                                                                                                • Significant innovation yet to come
                                                                                                • Key Players and Market Movers

                                                                                                  • There are over 50 retirement income product providers
                                                                                                    • The leading annuity providers
                                                                                                      • Recent sales figures
                                                                                                        • Figure 24: New annuity business, by the largest providers, 2017
                                                                                                      • The number of open market annuity providers drops again
                                                                                                        • More companies are competing in the income drawdown market
                                                                                                        • Competitive Strategies and Innovation

                                                                                                          • Major innovations still to come
                                                                                                            • Launch of more drawdown-focused funds and services expected
                                                                                                              • Scottish Widows launches Retirement Portfolio Funds for drawdown
                                                                                                                • Royal London to offer the option to swap guaranteed income for a bonus
                                                                                                                  • Robo-advice set to play a bigger role in retirement income management
                                                                                                                  • The Consumer – What You Need to Know

                                                                                                                    • Most in full-time employment have a pension
                                                                                                                      • Three fifths anticipate accessing pension at state pension age or later
                                                                                                                        • Those yet to retire more likely to consider an annuity than drawdown
                                                                                                                          • Control and flexibility a must but retirement options seen as confusing
                                                                                                                            • Only 27% would consult with an IFA about retirement income plans
                                                                                                                            • Pension Ownership and Access

                                                                                                                              • Most full-time employees have a pension
                                                                                                                                • Many savers hold multiple pension pots
                                                                                                                                  • Figure 25: Ownership of single and multiple pension pots, June 2018
                                                                                                                                • DB schemes remain more prevalent than DC schemes
                                                                                                                                  • Figure 26: Type of pension owned, by number of pension pots, June 2018
                                                                                                                                • Multiple pension ownership common among DC pension holders
                                                                                                                                  • Figure 27: Proportion of pension savers with a single pot versus two or more pots, by type of pension, June 2018
                                                                                                                                • Half of those aged 55+ have accessed their pension savings
                                                                                                                                  • Figure 28: Proportion of DC pension holders aged 55+ who have accessed pension pot, June 2018
                                                                                                                              • Age Expecting to Access Pension

                                                                                                                                • Most expect to access pensions at, or after, state pension age
                                                                                                                                  • Figure 29: When DC pension holders expect to access their pension (under-65s only), June 2018
                                                                                                                                • Delaying access a sensible option if available
                                                                                                                                  • Temptation to access pension pots rises as state retirement age nears
                                                                                                                                    • Figure 30: When DC pension holders expect to access their pension (under-65s only), by age, June 2018
                                                                                                                                  • Personal and financial well-being key in determining timing
                                                                                                                                  • Decumulation Options Likely to Consider

                                                                                                                                    • Annuities are favoured over drawdown…
                                                                                                                                      • Figure 31: Decumulation options likely to consider, June 2018
                                                                                                                                    • …but a partial cash withdrawal the most common option considered
                                                                                                                                      • Multipronged approach also a possibility
                                                                                                                                      • Attitudes and Expectations about Retirement Income

                                                                                                                                        • Retirement income control and flexibility in high demand…
                                                                                                                                          • Figure 32: Agreement with statements about retirement income options, June 2018
                                                                                                                                        • …but retirement income options are widely viewed as confusing
                                                                                                                                        • Sources of Retirement Income Advice and Guidance

                                                                                                                                          • Pension savers interested in advice and guidance but not paying for it
                                                                                                                                              • Figure 33: Sources of retirement income advice and guidance, June 2018
                                                                                                                                            • Employers are well placed to link savers with advisers
                                                                                                                                            • Appendix – Data Sources and Abbreviations

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

                                                                                                                                                    • Total market forecasts – best- and worst-case scenarios
                                                                                                                                                      • Figure 34: Forecast of new retirement income sales – Best- and worst-case scenarios, 2018-23
                                                                                                                                                      • Figure 35: Forecast of new retirement income premiums – best- and worst-case scenarios, 2018-23
                                                                                                                                                    • Forecast methodology