Changes to the way U.K. defined contribution plan participants access their retirement savings has given money managers a clean slate on which to design investment funds and strategies for retirement.
In his 2014 budget, delivered last month, Chancellor of the Exchequer George Osborne announced an end to the requirement for defined contribution plan participants to buy an annuity to fund retirement. The chancellor said the move gives participants “complete freedom” over how they access their retirement savings, removing a 55% tax charge on withdrawing the whole account at once and implementing instead a marginal rate of income tax, starting April 2015.
With about 350,000 people retiring in the U.K. each year, “the money managers could be the big winners,” said Andy Cheseldine, London-based partner at Lane, Clark & Peacock LLP. “Over 60% of annuities bought last year were for purchase prices of less than £30,000 ($50,000). We expect the vast majority of these to be taken as cash in the long-term — possibly spread over two or three years to keep the member below higher-rate tax thresholds. If managers can build scalable service propositions, offering good value for risk management expertise, then the opportunities are enormous.”
While U.K. insurers already have recognized that the move might signal a far smaller annuities market for them to play in than today's £12 billion market — with some putting all new sales and in-progress applications on hold — money managers are seeing the potential.
Annuities provider Legal & General issued a statement immediately following the budget announcement, detailing its confidence in other retirement offerings: “Legal & General is well-placed to continue to develop a product suite that includes good-value drawdown and protection against longevity risk as well as provision of investment income.”
Standard Life PLC is another annuity provider facing up to a smaller field in which to play.
“We have not put a number on it, but undoubtedly there will be a reduction (in annuity purchase),” said Jamie Jenkins, Edinburgh-based head of workplace strategy at Standard Life. “The question is what happens with the money people have — through automatic enrollment we will (continue to) see an increase in money put into pensions. That money is still there — it is just the compulsion to buy an annuity that is not.” Figures for the company's annuity business were not available.