The contraction over the past two decades of defined benefit plans and concurrent growth in defined contribution plans means an increasing pool of UK retirees will be coming into the market and seeking investment options for their lump sums.
As many of those retirees will be in less than perfect health, the option of underwritten annuities is attractive.
Underwritten annuities, first introduced into the UK pension annuity market in 1995, are already a significant market presence. According to research by the insurance and pension consulting firm of Towers Watson, UK sales of underwritten annuities have more than quadrupled since 2005, rising from that year’s total of £638.7m to £2,468m in 2010, and currently comprise more than 16% of the overall market. Currently, there is no sign of slowdown: First-half 2011 underwritten annuity sales of £1,430m could, according to Towers Watson, lead to an estimated £2.8bn of sales by the end of the year.
What is driving this growth? Several factors: Firstly, the move to defined contribution schemes. Secondly, awareness of the product has grown since its introduction. More and more defined contribution pensioners today are seeking to avail themselves of the financial advantage an underwritten annuity can provide for those with impaired health. As an example, a pensioner could experience period payment increases of typically 10% to 25% – sometimes even double or more – over what would have been available via a traditional, non-underwritten, annuity.
Thirdly, increased regulatory pressure on advisers to do the best for their clients, aided by sophisticated new online systems that enable more focused support. Fourthly, directives such as ‘Treating Customers Fairly’ and other regulation, have led to clearer communication between pension providers and their customers.
On top of all this is the anticipated growth that this market is due to experience. The pool of potential buyers for these annuities – individuals retiring with lump sums in defined contribution plans – is about to mushroom. The very sizable baby boom cohort (those born 1946-1961) is now moving into the retirement phase of life, so the number of individuals retiring each year will rise and stay high.
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