Annuity market to collapse by £8bn because of rule switch
SAVERS fleeing the pension annuity market will cause it to collapse by two-thirds over the next 18 months, analysts predict, as the fallout from the Budget continued to hit markets.
Barclays analysts said the annuity market could shrink from £12bn a year to just £4bn by September 2015, due to changes announced in the Budget, which will scrap annuity pension income and allow savers to take all their cash at once.
Traders sent top providers Just Retirement and Partnership Assurance – which make most of their operating profits from annuities – down further yesterday after widespread stock downgrades from banking analysts.
Both are expected to sit down with the Prudential Regulation Authority next week to discuss the price decline.
Credit Suisse analysts yesterday also forecast potential capital outflows from the life insurance sector, while Deutsche Bank analyst Oliver Steel added: “We believe the impact of this on future individual annuity sales will be profound.”
Larger insurers such as Legal & General, Aviva and Standard Life, which rely less on single annuities, rose back slightly as investors were calmed by the figures.
The move away from annuities will also have implications for the fund management industry, with analysts predicting that about £165bn could be shifted out of so-called lifestyle funds, which cater to people hoping to buy an annuity.
Hargreaves Lansdown predict less people will buy into fixed income as they approach retirement because there will be no obligation to buy an annuity. “People will be equity investors longer into life,” the firm’s corporate analyst Laith Khalaf said. Fund management stocks have also risen as investors anticipate a savings boom from giving people complete access to their pension pots. FTSE 100 wealth manager St James’s Place closed the day up 1.62 per cent while Henderson rose 2.28 per cent. RBC Capital Markets analyst Peter Lenardos previously said that retail fund managers would benefit the most from the change.
WHY IS THIS HAPPENING NOW?
GEORGE Osborne delivered a Budget which, many believe, will help the Tories win back older voters who may have turned to Ukip. As Huw Evans of the Association for British Insurers said yesterday, it’s political in more ways than one. The government has been criticised for doing very little to help savers as interest rates remain low. “It is politically possible in this Budget because of the unique combination of the Single State Pension reforms, auto enrolment and the Triple Lock promise which have provided greater certainty about future pension entitlements and the level of saving being undertaken,” he said.
THE IRELAND PRECEDENT
The fact that people will no longer be forced to buy annuities when they retire is seen by some as scary. But similar changes were successfully pushed through in Ireland in 1999 and the pensions system coped just fine. People still save lots and there has been no crisis. In fact, the reforms were hugely popular and probably inspired George Osborne. One caveat, however: a desperate, cash-strapped Irish government has taken to raiding pension funds, slapping a special levy on their values, to the anger of taxpayers. But it is clear that scrapping annuities worked.