Analysts at Barclays predict Chancellor George Osborne’s ‘pensions bombshell’ in yesterday’s Budget will see the individual annuity market contract by two-thirds in the space of 18 months.
In the Budget yesterday, Osborne revealed a radical shake-up of pension rules which will mean that from April 2015 anyone over the age of 55 will be able to take their entire pension pot as cash.
Responding to the reforms, Barclays analysts say: “We believe the UK Budget has the potential to lead to the demise of the UK individual annuity market. Our base case is now that the individual annuity market could decline by two-thirds from £12bn to £4bn per annum within the next 18 months.”
The analyst note, co-authored by Alan Devlin, Chris Roberts, Daniel Garrod and Toni Dang, compares the UK market to the US where there is no requirement to buy an individual annuity. It says in the US just 3.6 per cent of annuity sales are made up of individual annuities.
They say the business model for firms focused on individual annuity business is “potentially irrevocably damaged.”
They add businesses with a larger back-book of individual annuities and a larger footprint in the bulk annuity markets will be better positioned.
Partnership Assurance saw its share price drop 55 per cent yesterday and has seen falls of 10 per cent since the start of trading today.
Barclays analysts say: “Yesterday’s Budget has severe ramifications on the business model of Partnership, which is particularly acute given new business accounts for nearly 80 per cent of its profitability in any one year, and individual annuity sales account for 90 per cent of total sales. While the company may accelerate its growth in the bulk annuity market, this will only partially offset the potential decline in individual sales.”
Barclays analysts add they believe yesterday’s tumble in the Legal and General share price was an overreaction, and believes its focus on the bulk annuity market could offset declines in individual annuity sales.