UK Annuities and Income Drawdown Market Report
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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.
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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.
Senior Financial Services Analyst
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.
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* This is a sample representation of the report layout and does not reflect the research included in this report.
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