The UK pension system has come under unprecedented political and regulatory scrutiny over the past few months with various stakeholders issuing warnings and calling for reforms.
Among the various issues being discussed is the issue of annuities - insurance contracts that provide pensioners an income for life after retirement. With the recent aversion towards annuities due to falling rates, a report released by conservative think-tank, Policy Exchange, last week has urged the government to take steps for a major shake-up of the market for annuities.
UK’s retirement crisis is now at a level where Policy Exchange has advised the government to force people to save, and abolish the rule that allows people to opt out from pension funds.
In several government reports over the past one month, pension minister, Steve Webb has raised various questions about the nature of annuities and suggested people to explore other options at retirement. This was followed by feelings of resentment from various pension industry figures, criticizing government’s lack of method is resolving annuity issues.
Experts believe low annuity rates, seen as a direct result of low interest rates, are turning annuity products into low yielding investments. Policy Exchange suggests there should be a relaxation in the tax rules that currently favour annuities. These could include allowing income from investment funds to count toward minimum retirement income limits.
But according to a latest report from market research company, Spence Johnson, shake-up of the annuity market will create new opportunities for UK’s fund managers, who are trying to use specialist funds called drawdown funds to challenge the stranglehold of big insurers. These funds invest in shares and bonds and are designed to produce regular income – a requirement of the retirees. They are called drawdown funds because savers are able to draw down an income from them.
Currently funds managers are packaging drawdown funds as Self Invested Personal Pensions or SIPPs that are sold through retail fund platforms. According to the Spence Johnson report, Standard Life is the biggest seller of drawdown funds at present.
Although with SIPPs investors can put their money into almost anything, 80% of it goes into investment funds. Spence Johnson predicts the assets held in drawdown funds to increase from the current £53 billion to £135 billion by 2023, making drawdown funds the fastest-growing segment in the post-retirement savings market.
Spence Johnson expects annuities to continue to dominate the most part – growing from £193 billion today to as much as £300 billion by 2023, but believes it’s the drawdown funds that hold the biggest opportunities for fund managers.