Bottom Line: This will be the end for some – but for others it’s a chance to innovate
GEORGE Osborne’s bombshell Budget announcement means the law that introduced annuities is not even going to make it to its 60th birthday.
Since the Finance Act of 1956, Britons have been forced to buy an annuity at some point between the age of 60 and 75. But from April next year, that requirement will be scrapped, giving pensioners the freedom to draw down their pension pot and spend it as they wish.
It’s sent certain members of the industry into a tailspin, with investors deserting annuities providers as analysts warn the industry could shrink by as much as two thirds over the next 18 months.
But as ever, there are winners and losers. First, the losers. Or the “double-downgrades” as they might as well be known after yesterday, when Partnership – whose shares have lost more than 68 per cent since Wednesday – was slashed from overweight to underweight by Barclays.
It’s not hard to see why. Partnership relies on new individual annuities business for 67 per cent of its profits. Wipe out the industry, and you wipe out the value of the company very fast.
It could be even worse for Just Retirement, which draws 75 per cent of profits from annuities and is also down 50 per cent.
So far so bad, but not everyone is concerned. Shares in the UK’s four pension big hitters – Aviva, Prudential, Standard Life and Legal & General – all recovered slightly yesterday after taking a hit of between two and eight per cent the previous day.
The first two in particular have less to worry about. Both have annuities exposure of less than five per cent, alongside a vast portfolio of other products that they already offer clients. On top of that the Pru can also import products from the US, where annuities are already not compulsory. There, immediate annuities count for just 3.6 per cent of the market – or £8bn – just two-thirds of the total in the UK now, before the changes come into play.
If analysts are right, that figure could fall as low as £4bn by next summer, leaving a much smaller pot of customers for competitors to fight over.
But not none. Armed with the independent advice that the government is also making compulsory, many may still plump for an annuity to avoid the investment risk associated with the alternatives. Failing that, they’re going have to innovate. As well as US imports, there’s scope for a whole raft of new products that companies could produce, as well as offering drawdowns as separate products or shifting their focus on to bulk annuities.
It’s time to get creative – and only the most inventive will survive.