1 Annuities in the UK Sarah Meagher Department of Work and Pensions

2  Background  The tax framework  Market outline  Impact on individuals  Future challenges

3 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

4  Background  The tax framework  Market outline  Impact on individuals  Future challenges

5 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.

6  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

8 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

9 Competition in the annuity market  The annuity market is highly concentrated One firm – Prudential sold 23% of new business in 2005

10 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

11  Background  The tax framework  Market outline  Impact on individuals  Future challenges

12 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 MeanMedian Occupational pension £40£24 Personal pension £54£27 Overall average £47£23

13 When do people annuitise? The age of annuity purchase is closely associated with when people retire Age of annuitisation Before – – –745 Source: ABI, 2002

14 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 IndexedOtherDon’t know 42%15%12%5%9%17% Source: ABI 2002

15  Background  The tax framework  Market outline  Impact on individuals  Future challenges

16 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 LowMediumHigh Individual annuities Draw down Bulk buyout Source: ABI/Watson Wyatt 2003/4

17 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

18 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