Annuities in the UK

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Annuities in the UK

• Sarah Meagher
• Department of Work and Pensions

2

• Background
• The tax framework
• Market outline
• Impact on individuals
• Future challenges

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What is annuitised?

• Pension saving from voluntary, defined
  contribution schemes
• Defined contribution schemes
• Occupational DC schemes organised via the
  employer on a trust basis
• Personal pensions
• employer based group schemes
• Individually purchased
• Individuals with large funds or religious
  objections to risk-pooling can draw down income
  from fund without annuitising, subject to limits
• DC schemes growing in coverage so more people
  will need to annuitise at retirement
• Defined benefit schemes provide pension income
  within the scheme

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• Background
• The tax framework
• Market outline
• Impact on individuals
• Future challenges

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The tax framework

• Pension income must be secured as part of the
  deal on tax relief
• Tax relief on contributions, relief on
  investment, taxed on the way out
• pension income cannot be accessed before the age
  of 55 and income must be secured by the age of
  75
• up to 25 per cent of a pension fund can be taken
  as a tax-free lump sum
• individuals who have accumulated small pension
  funds are not required to secure a pension income
  and can take their pension as a taxable lump sum
• if an individual dies before reaching age 75
  without accessing their savings, a further
  pension or lump sum will be payable to their
  dependants.

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• Background
• The tax framework
• Market outline
• Impact on individuals
• Future challenges

7
The annuity market number of contracts sold
Income drawdown policies are around 5 of all new
annuities
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Value of annuities sold each year
Income drawdown is 21 of annuities by
value Average value of annuity is 23,600 in
2006 Average value of drawdown is 104,00 in 2006
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Competition in the annuity market

• The annuity market is highly concentrated
• One firm Prudential sold 23 of new business in
  2005

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Moneys worth - Cannon and Tonks Survey of Annuity
Pricing

• Looking at the expected value of annuities, as
  measured by the moneys worth, shows that
  annuities have been fairly priced
• Paying out over time what people put in

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• Background
• The tax framework
• Market outline
• Impact on individuals
• Future challenges

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Impact on individuals

• The impact of annuities on pensioner income is
  growing over time as more people reach retirement
  having saved in a DC arrangement
• 20 of recently retired pensioner units have
  personal pension income compared to 12 overall
• Average annuity income per person per week, for
  those who are receiving some

Mean Median
Occupational pension 40 24
Personal pension 54 27
Overall average 47 23
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When do people annuitise?

• The age of annuity purchase is closely associated
  with when people retire

Age of annuitisation
Before 60 14
6064 40
6569 41
7074 5

• Source ABI, 2002

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What do they buy

• Consumer research asked a group of recent
  annuitants what they had purchased

Level, single, not guaranteed Level, single, guaranteed Level, joint Indexed Other Dont know
42 15 12 5 9 17
Source ABI 2002
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• Background
• The tax framework
• Market outline
• Impact on individuals
• Future challenges

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The future continued growth of annuities

• Demand for annuities is likely to grow
• DC scheme maturity and baby-boomers retire
• Also potential for DB schemes to convert into
  insurance backed products
• Will bond issuance grow to meet this demand?
• Scenarios for further annuity demand, bn

2002 2012 2012 2012
2002 Low Medium High
Individual annuities 7.2 16.6 18.1 19.7
Draw down 2.3 5.3 5.8 6.3
Bulk buyout 1.4 1.5 35.4 128.1
Source ABI/Watson Wyatt 2003/4
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Consumer attitudes to annuities

• The requirement to annuitise regularly comes
  under pressure
• To remove the requirement completely or partially
  for those with very large funds
• To significantly increase the latest age by which
  you must secure your income
• General concerns that annuities are perceived to
  be poor value
• Rates have fallen significantly as life
  expectancy has increased and interest rates
  decline
• Lack of awareness and action on searching the
  whole market to find the best rate

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Other drivers of change

• Personal Accounts
• Extending pension membership to wider section of
  employees
• Leading to higher pension saving which will
  require annuitisation
• OMO review
• Improving individuals decision making on what
  annuity suits their needs and circumstances
• Encouraging individuals to purchase a
  competitively priced annuity