Sofa managing director Bob Bullivant says the annuity market will shrink by more than a quarter to £5bn from its current level of £7bn when pension simplification takes effect in April 2006.
He says the sector will be squeezed at the top and bottom, with the raising of the trivial commutation limit cutting out thousands of small funds while alternatively secured income will become an alternative for bigger funds.
People with funds up to £15,000 will not need to buy an annuity. Under current rules, annuity purchase is obligatory unless the fund could buy total income of less than £260 a year.
Annuity providers could be forced to reduce rates as they lose large amounts of business with favourable mortality experience for them, says Bullivant.
He says: “The market is facing removal of the more favourable clients and potential reduction of rates as European sex equality rules are adopted both compounding the unpopularity of annuities with alternatively secured income becoming increasingly favoured.”