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LONDON (Alliance News) - Shares in UK annuity providers plummeted Wednesday after Chancellor of the Exchequer George Osborne did away with compulsory annuities, giving people far more control and flexibility over how they manage their pension pots as they plan for retirement.
Legal & General Group PLC sank by 8.0% to 212.10 pence in the aftermath of the news, while fellow FTSE 100 life giant Aviva's shares fell by 5.4% to 489.40. Resolution Ltd, which offers annuities through its Friends Life brand, down 6.1% to 329.60 pence. Specialist annuities provider Partnership Assurance Group PLC, which had earlier seen some pressure on its share price after it reported a slowdown in new business sales, saw its shares plummet by 56.5% to 139.00 pence on the FTSE 250. Just Retirement Group PLC was down 43.6% at 150.75 pence.
From April 2015, the government will change the tax rules to allow people to access their defined contribution pension savings as they wish from the point of retirement. The government has published a consultation on how to implement the changes.
Drawdown of pension income under the new, more flexible arrangements will be taxed at marginal income tax rates rather than the current rate of 55% for full withdrawals.
Under the changes, people will be able to take all their pension savings as a lump sum, draw them down over time, or buy an annuity.
Maintaining its 2014 guidance of GBP290 million of operating cash for its retirement business, Legal & General moved to allay investor fears about the scale of the changes, saying some areas of its business could even stand to benefit from Osborne's plans as savers increase the amount they set aside for retirement.
It said Legal & General Investment Management and Cofunds, which have a combined GBP514 billion in assets under management, are "well-positioned" to benefit from increased savings rates, while adding that almost two-thirds of its retirement products business's GBP34.4 billion in annuity assets are derived from corporate transactions, which it said are outside the scope of the new regulations.
The FTSE 100 insurer petitioned the UK government to bring forward the planned higher contribution levels under auto-enrolment, institute a fairer, less regressive tax regime for the accumulation phase of pension saving, and accelerate the rise in the retirement age.
Association of British Insurers Director General Otto Thoresen said the changes represent a challenge for "everyone involved in helping people secure their retirement income".
"These are important reforms and it is crucial for savers to get them right. It is right for people to be offered a range of options to generate retirement income, and it is crucial to ensure that customers have the information they need to make the right choice for their circumstances. The guaranteed lifetime income provided by an annuity can play an important part in discussions with customers considering their options," Thoresen said in a statement.
Just Retirement issued a statement in which it welcomed changes which improve flexibility for retired people.
"Proposals to ensure that all consumers will receive guidance at retirement are clearly a positive move in improving customer outcomes. This could suggest an increase in the numbers of customers shopping around using the open market option," Just Retirement said.
Delivering his fifth budget statement, Osborne unveiled the massive change alongside a host of other measures designed to help savers, such as the merging of stocks and shares individual savings accounts and increasing the annual limit to GBP15,000 from July 1.
"People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances," Osborne said.
Osborne unveiled changes that will come in to effect from March 27, 2014 as a first step to the wider pension reforms. The Chancellor said the amount of guaranteed income people need in retirement to access their savings flexibly will be reduced to GBP12,000, from GBP20,000, while the total pension savings that can be taken as a lump sum, are also to be increased by GBP12,000 to GBP30,000.
The capped drawdown withdrawal limit will be increased to 150% from 120% of an equivalent annuity, and the maximum size of a small pension pot which can be taken as a lump sum, regardless of total pension wealth, will be increased by GBP8,000 GBP10,000. The number of personal pots that can be taken under the rules is to be increased to three from two.
Osborne also said National Savings & Investments will launch a new bond to people aged 65 and over, that will offer superior interest rates to those that have come to be expected in the environment of all-time low interest rates.
He also raised the cap on premium bonds by GBP10,000 to GBP40,000.
PwC UK Insurance Leader Jonathan Howe told Alliance News that the life insurers will still play a major role in savings, and that other investment products will be created to fill the gap.
"The needs of individuals in retirement have changed hugely in the past few years and we know there's going to be much more change as people live longer, so greater flexibility around how individuals can use their access is very welcome to them," Howe said in a telephone interview.
"There will be a key role for insurers and other investment houses to provide information and guidance as part of their services," Howe said, adding that there will be an effect on the products offered by insurers heavily involved in providing annuities.
Howe said that life insurers have been in talks with the government for some time, indicating there was an awareness that reform is needed.
"I suspect the security offered by an annuity will still be very attractive to a large amount of the market. The question is what sorts of products will be available," Howe said.
"What these new products will look will depend to a large extent to how these rules look when they're finalised," Howe said.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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