What you need to know
The implementation of Pension Freedoms legislation in 2015, combined with low annuity rates, a rising stock market and a lack of competition among annuity providers, has completely transformed the retirement income market. Previously a niche product, income drawdown new business volumes are now nearly three times larger than those of annuities. Annuities, however, are still highly relevant in retirement planning, offering unparalleled levels of security, something that Mintel research has revealed to be a top priority for non-retired DC pension savers.
The sharp increase in the proportion of consumers entering drawdown has raised concerns about just how prepared the average person is to handle the increased complexity and risk that come with choosing to go down this route. Indeed, since the introduction of new pension rules, there has been considerable growth in the proportion of individuals entering drawdown without first seeking advice. In order to mitigate against the potential for disastrous retirement planning outcomes for retirees, new rules from the FCA are set to come into place within the next year, which will require non-advised customers to take a more considered approach when entering drawdown.
This Report examines how the market for annuities and income drawdown is faring four years on from the introduction of Pension Freedoms. It includes an in-depth overview of market performance, trends in distribution and comprehensive data about what DC pension savers are doing when they access their pensions. Mintel’s exclusive consumer research provides valuable insight into what those yet to retire think about their retirement income options, what kinds of decisions they anticipate they will make, their current level of planning and what their key concerns are about how they will use their pension pot in retirement.
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) 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.
