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* Budget changes forcing savings industry shake-up
* Savers free to shun annuities, spend how they like
* New insurance products slow to arrive
* Fund managers offering target-return funds
By Simon Jessop and Carolyn Cohn
LONDON, Nov 25 (Reuters) - Billions of pounds in savingsthat retiring British workers would have swapped for an incomefor life are up for grabs after recent rule changes - and fundmanagers are battling insurers for a slice of it.
Surprise reforms announced by the government this year meanBritons are no longer forced to buy a guaranteed income - anannuity - at retirement, so savers can do what they like withtheir money when the rules take effect in April.
The choice currently facing retirees is largely betweenbuying an annuity - where the insurer takes on the risk thatmarkets slump or you outlive your money - or some form of"drawdown" product, where the pensioner takes out some of theirpension every year and manages it themselves.
Annuity payouts on offer to pensioners have slid since theonset of the financial crisis in tandem with declining interestrates, and are expected to be depressed for several years.
Demand for the high-margin products more than halved in thethird quarter to 1.5 billion pounds, in anticipation of the newrules, while the drawdown market - far less profitable forinsurers - nearly doubled, industry data showed.
To survive in the new order, insurers are scrambling tocreate more flexible products combining elements of both, forretirees with an average pot of money - 25,000-60,000 pounds($40-90,000).
At the same time, asset managers have been keenly monitoringhow much money is pulled out of insurance products in favour oftheir stock and bond funds, and are increasingly offering fundswhich target a specific return - an attractive option forpensioners.
"Today, if you retire at 60, you're likely to live for atleast another 20 years, so you probably need to retain someexposure to growth via equity markets, at least initially, andthen later on you may choose to annuitise, or look for a form ofguaranteed return," said Edward Houghton, insurance analyst atbrokerage Sanford Bernstein.
The decline in the annuities market has been a bitter blowto insurers. Annuities could give them a margin of 10 percent,while drawdown products typically deliver 1-2 percent.
The upheaval is seen as a major factor behind the planned5.6 billion pound tie-up between Aviva and Friends Life, and comes as annuities face regulatory scrutiny foroffering poor returns.
REWARDS
Most drawdown products are offered by insurers, althoughinvestment platform Hargreaves Lansdown and others suchas AJ Bell provide similar products to those who invest theirpension money themselves.
While there was "a lot of head scratching" about what newproducts could be developed, few had been yet, said Tom McPhail,head of pensions research at Hargreaves Lansdown.
He cited some examples, however, such as variableannuity-type products from the likes of Metlife, whichconvert part of their savings into a guaranteed income, whileleaving some to invest.
Just Retirement is also planning a similar product,finance director Simon Thomas said.
Legal and General finance chief Mark Gregory saidit, too, expected to have a range of products available. It isalso looking at offering lifetime mortgages, which enablepensioners who own homes to release equity from the assets,which is then paid back when they die.
Meanwhile asset managers, while unable to offer a guarantee,are hoping to attract customers with the lure of higher returns.
A favoured option for retirees is likely to be funds thattarget a specific return, say by beating inflation by 2 percentafter fees.
British target-return funds held $3.4 billion at end-Octoberand had taken in $120 million since March, Lipper data showed.
Asset managers are facing pressure on fees from severaldirections, including low-cost passive funds, where charges canbe as little as 0.3 percent, and a regulatory drive to cap thecost of investing money on behalf of pension schemes at 0.75percent. Target-return funds, however, can earn them fees ofaround 1.5 percent.
Fund firms may have to take a fee hit to get theirretirement-focused funds recommended to retail investors througha platform such as Hargreaves Lansdown, said Sanford Bernstein'sHoughton.
Most though will want to try, given the rewards on offer.
David Hutchins, head of multi-asset pension strategies atAlliance Bernstein, cited client research conducted by the firmshowing more than 80 percent of people intended to keep theirmoney invested in some way after retirement.
"The question is, is that in an asset management product, aninsurance product or a bank account?" (Additional reporting by Nishant Kumar; Editing by Pravin Char)
