Just 50% of those who say they are confident making decisions about their pension correctly identified that a flexible drawdown product does not provide a guaranteed income for the duration of retirement. This suggests that a worrying number are making or preparing to make ill-informed decisions and require significantly more guidance at an earlier stage of the retirement planning process.

COVID-19 initially had a negative impact upon both the annuity and drawdown markets. Stock market turbulence and ongoing economic uncertainty resulted in some people taking a more cautious approach and holding off retirement income plans until more stability has returned.

55-64s are at particular risk in this crisis. At a time when this age group should be looking to bolster their retirement savings, growing numbers are facing a loss of income or redundancy, which could dramatically alter the outlook of their retirement. Some in this group will be forced to dip into pension savings earlier than expected, which could undermine their long-term plans and retirement funding options.

Annuity sales have declined significantly in recent years following the pension freedom reforms. However, the COVID-19 outbreak has highlighted the benefit of having access to a guaranteed income in retirement. Even if people remain reticent about using their entire pension fund to buy an annuity, there is a growing opportunity to position annuities as part of a blended approach to retirement income alongside more flexible drawdown options.

Key issues covered in this report

  • The impact of COVID-19 on the retirement income market and the outlook for the market.

  • Ownership of pensions and interest in different decumulation options at retirement.

  • Assessment of the knowledge and confidence in understanding retirement income options.

  • Consideration of the factors people think about when accessing pensions in retirement.

COVID-19: Market context

The first COVID-19 cases were confirmed in the UK at the end of January, with a small number of cases in February. The government focused on the ‘contain’ stage of its strategy, with the country continuing to operate much as normal. As the case level rose, the government ordered the closure of non-essential stores on 20 March.

A wider lockdown requiring people to stay at home except for essential shopping, exercise and work ‘if absolutely necessary’ followed on 23 March. It wasn't until 15 June that non-essential stores were allowed to re-open,followed by pubs, restaurants, hotels and hairdressers on 4 July, and many beauty businesses on 13 July.

By September, it had become clear that the UK was at the start of a second wave, and social distancing measures were intensified. Continued increases in infection numbers led to Wales implementing a two-week national lockdown from 19 October, England announcing a full month-long lockdown from 5 November, and Scotland introducing a new five-level system of coronavirus restrictions. 

The UK lockdown ended as planned on 2 December, but the revised Tiered lockdown meant that almost all of the UK faced heavy restrictions on social activities. Although all non-essential retailers were able to re-open, foodservice and hospitality businesses still face extremely challenging conditions. The successful vaccine trials, however, show that there is a path out of the crisis, and the first UK vaccination was administered on 8 December.

Economic and other assumptions

Mintel’s economic assumptions are based on the Office for Budget Responsibility’s central scenario included in its November 2020 Fiscal Sustainability Report. The scenario suggests that UK GDP could fall by 11.3% in 2020, recovering by 5.5% in 2021, and that the annual average unemployment rate will reach 4.4% in 2020, rising to 6.8% in 2021.

The current uncertainty means that there is wide variation on the range of forecasts, however, and this is reflected in the OBR’s own scenarios. In its upside scenario, GDP contracts by 10.6% in 2020 and returns to its pre-COVID levels in 2021. Its more negative scenario, by contrast, would mean that GDP falls by 12% in 2020 and doesn’t recover until 2024.

The Welsh and English lockdowns will inevitably have an impact on GDP and consumer finances, potentially shifting the UK closer to the OBR’s downside scenario. The market forecasts in this Report reflect this new reality.

From the start of the outbreak, we have made the assumption that an effective vaccine would not be widely available until well into 2021. On 9 November, Pfizer and BioNTech announced highly encouraging results from trials of their vaccine, followed by similarly positive results from Moderna. This means that a vaccination programme may be brought forward, but a full rollout will take many months, so Mintel is still making the assumption that we will be living with COVID-19 for some time to come.

Products covered in this Report

This Report examines the UK market for individual annuities and income drawdown which are typically used by people with a DC pension pot to provide an income in retirement.

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. In November 2020, the government confirmed that the age people can access their pension will rise to 57 in 2028.

At age 55 (57 from 2028), DC pension savers have the option of buying an annuity (secure income), moving into flexible drawdown (variable income) or withdrawing cash in a series of lump sums or the entire amount in one go (also known as UFPLS). 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 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 tax-free, while the remaining 75% is taxed as income at the pension holder’s marginal rate.

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