New annuity sales have declined dramatically following the announcement of pension reforms in the 2014 Budget, and the introduction of the reforms a year later in April 2015. Annuity new contracts declined by 79% between 2011-15, while income drawdown sales increased by 317% in the same time frame.

The continued rollout of auto enrolment is likely to put both annuities and income drawdown providers in a position for future growth. The ageing population and the introduction of the flat rate state pension should also increase the number of people turning to these products in the long term. However, following the result of the EU referendum which has led to lower annuity rates and uncertainty among consumers there will be a growing number of people who put their retirement plans on hold for the short to medium term.

The recent contraction in new sales has resulted in some of the major players in the market reevaluating their position and taking steps to either mitigate the effects of the decline in annuity sales or shore up their position within the market by merging with other providers. Providers have begun to introduce hybrid or blended products that give consumers the comfort of having some guarantees over their retirement income, and also the opportunity to keep some of their pension invested to grow.

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.