Planning for Retirement Market Assessment 2008
Key Note Publications Ltd, October 2008, Pages: 222
Planning for future pensions — state, occupational and private — is extremely difficult in the context of high economic and political volatility. Investments that have the best growth prospects over the next 30 years include land for forestry and farming, mines and wells, biotechnology, and energy efficiency products and services, but the ordinary pension saver is unlikely to have easy access to pension funds specialising in these sectors.
Workers on ordinary incomes have better pension prospects in the public than the private sector. The high tax rates that will be necessary to pay public-sector pensions will make it even harder for private-sector workers to save for their own pensions. In any case, participation in private and occupational pensions is not common until after the age of 25 and peaks among 45 to 54 year-olds. Problems weighing on pensions include pensioners' increased longevity, higher taxation demands on pension funds, the collapse in investment returns in the early 2000s and in 2008, and the levy to finance the Pension Protection Fund for occupational schemes. There were only 37,540 open occupational schemes in the UK in 2006, a fall of 40% since 2000, and within this total there were fewer than 5,000 open defined-benefit private-sector and quasi private-sector schemes.
Personal pensions are failing to attract subscribers in sufficient numbers to compensate for the decline in occupational pensions. Most personal pension fund sizes are very small. In April 2006, among women aged 35 to 44, 89.8% had less than £30,000 in their pension fund, compared with 78.7% of men. Self-Invested Personal Pensions (SIPPs) cater for affluent contributors and are often restricted to those with pension funds over £100,000. SIPPs enable contributors to make their own decisions, within some limits, on where their money is invested.
Personal Accounts are the Government's proposed initiative to increase the pension savings of people on low to moderate incomes, but are not planned to start until 2012. Demands on individuals' incomes are increasing at such a rate in 2008 that the likelihood of greater voluntary pension saving seems dim, except at the top of the income scale, and some form of compulsion is looking increasingly inevitable.
The UK's low state pension — £90.70 a week in 2008/2009 — is augmented by means-tested credits, which are complicated to understand and claim. The Pensions Reform Group proposed a universal protected pension (UPP) of 25% to 30% of average earnings, but the Government rejected the plan, instead choosing Personal Accounts. Personal Accounts — contributory plans into which workers will be enrolled automatically, with provision to opt out — should be available from 2012. The framework for Personal Accounts is in the Pensions Bill 2007, which also included gradually raising the minimum state pension age to 68, reducing the number of years of National Insurance contributions to qualify for a state pension and converting the State Second Pension (SSP) into a flat-rate supplement. The objective of these changes is to persuade individuals to take more responsibility for their own pensions, with the SSP as a safety net for unpaid carers and low earners.
A more liberal regime for maturing retirement funds began on 6th April 2006. Retirees no longer have to purchase an annuity by age 75, thus opening the door to different retirement products.
There are two main types of equity-release plan: lifetime mortgages and home-reversion plans. A lifetime mortgage enables the homeowner to borrow a percentage of the property's value without any repayments until death or sale. Home-reversion plans allow homeowners to sell all or a part-share of their home for a capital sum or an annuity, and the right to remain in the property for life or until going into long-term care. A high rate of home ownership and inadequate pension provision have driven the equity-release market.
The equity-release market as a whole has shown undulations rather than consistent growth, although the flexible lifetime mortgage segment shows rapid expansion. In a falling property market, guarantees of no negative equity on lifetime mortgages can be very risky for the financial-services sector, in similar fashion to subprime loans.
Latent demand for equity release is expected to remain strong, but there is a risk of a downward wealth spiral, as the retired generation increasingly cashes in its assets and has little to leave to its heirs. There is also the possibility that the extent of remortgaging before retirement could restrict the potential for equity release after retirement. The rise of sale and rentback is also a potential threat to future equity release.
The proportion of the UK population needing to worry about wealth management is, in 2008, falling quite fast, as heavy debts and falling property prices created a feel-bad factor. On the other hand, the personal wealth of the most affluent individuals is still increasing. To an increasing extent, national government revenues come from those without access to, or from those who choose not to access, these supra-national circuits.
Wealth management is a niche business, although inheritance-tax planning has wider relevance, especially in regions with expensive property. Inheritance-tax planning is most worthwhile for individuals with estates worth more than £312,000 in 2008/2009. Typically, around 35,000 estates a year are subject to inheritance tax.
Good long-term residential care is very expensive, but less than 0.1% of the adult population has long-term care insurance. Around one in five of the over-85s receives long-term care; by 2010, that will be approximately 280,000 people. In addition, nearly one in ten 65 to 74 year-olds needs long-term care.
Improvements in pensions regulation in Organisation for Economic Co-operation and Development (OECD) member states adds to the costs of scheme management and administration, and makes small contributions to personal and occupational schemes less economic for providers. The problem of administering small contributions at economic cost will be an important issue as individuals are told to take more responsibility for funding their own retirements.
UK pensioners often complain that the state pension is too low, but the UK compares well with most other EU countries in its total public expenditure on old-age social benefits. The issue in the UK is the concentration on means-tested additional benefits, which keep the basic pension too low to survive on. All over the world, retirees with inadequate incomes will have to look for work.
Public and private debt will limit individuals' capacity to save for retirement. In addition, the recent experience of rising longevity means that more adults have to become carers for older relatives, restricting their earnings from work.
The productive base of the economy has become too narrow, but energy shortages will spur economic restructuring that should create a broader range of job opportunities than at present. On the other hand, in a future of scarcer and more expensive resources, government will struggle to maintain, let alone increase, levels of public spending. As a consequence, it will be difficult to fund health improvements leading to still higher longevity, and the number of years spent in retirement could even fall.
The extended family is likely to assume greater importance as a social, economic and financial-planning unit, provided that forces leading to family breakdown can be held in check. The relocalisation of industry — to serve super-expensive and climate-changing transport costs and emissions — should enable more members of extended families to live near each other and create mutual support networks. A stronger layer of small to medium-sized family businesses should contribute to more equitable income distribution.
Personal Accounts are at the heart of government plans for pension changes from 2010, but the proposed contribution levels are too low. Future legislation could include an `ageing levy' added to National Insurance, to fund long-term care for people without sufficient resources of their own.
Private-sector developments include Life Trust Holdings' Longevity Payment Plan, which was launched in January 2008 and provides an income that increases with age. The US insurer Lincoln launched Elderly Care Benefit into the UK in 2008. This is a critical illness policy covering those illnesses that result in the victims needing long-term care. Family pensions are another idea. The Family Pension Trust from Rowanmoor Pensions is a self-invested personal pension established under trust for more than one contributor, either family members or business partners.
At present, the halfway house of a low basic pension plus extensive means testing persuades many people against saving. One policy option for the future is to reduce state retirement spending and force individuals to take responsibility for funding their own pensions, with a minimal welfare safety net. Another option is for the state to take on responsibility for providing a non-means-tested pension that is sufficient for living in moderate comfort.
Retirement planning is not just about pensions, but should include wider social policies; for example, to encourage family-based economic activity and multi-generation housing.
Executive Summary
1. Introduction
THE TOPIC
OBJECTIVES
RESEARCH
Original Research
Problems in the Research Process
DEFINITIONS
2. Strategic Overview
MARKET DYNAMICS
Savings to Fund a Decent Pension
Participation in Pensions
Table 1: Participation in Pensions in Great Britain by Type of Pension (% of adults), Year Ending March 2008
Table 2: Pension Status in Great Britain by Type of Pension by Sex (% of adults), Year Ending March 2008
Table 3: Pension Status in Great Britain by Type of Pension by Age (% of adults), Year Ending March 2008
Table 4: Pension Status in Great Britain by Type of Pension by Household Income (% of adults), Year Ending March 2008
The Pensions Landscape in 2007
New Premiums
Raft of Problems
Occupational Deficits
Little Money Flowing into Personal Pensions
Islamic Pensions
Self-Invested Personal Pensions
Population Issues — Rising Number of the Over-60s
Table 5: Number of People Aged 60 and Over in the UK (000 and %), 1976, 1986, 1996 and 2006
Table 6: Forecast Number of People Aged 60 and Over in the UK (000 and %), 2006-2046
Table 7: Projections for Men and Women Aged 75 and Over in the UK by Age (000 and ratio), 2006, 2016 and 2026
Who Saves What?
Table 8: UK Households by Amount of Savings and Assets by Type of Household (%), 2006/2007
DISTRIBUTION
Table 9: Distribution of New Single-Premium Individual Pensions and Related Products in the UK (% and £m), First Quarter 2005 to Fourth Quarter 2007
COMPETITIVE STRUCTURE
ADVERTISING
CONSUMER TRENDS
FORECASTS
KEY POINTS
3. State Pensions
COMPLEX MEANS TESTING
UNIVERSAL PROTECTED PENSION
PERSONAL ACCOUNTS
SECOND-TIER STATE PENSIONS
KEY POINTS
4. Annuities and Other Retirement Income Products
AFTTER `A DAY' — MORE FLEXIBILITY, BUT GREATER COMPLEXITY
UNSECURED INCOME
ALTERNATIVELY SECURED INCOME
SECURED INCOME
ANNUITIES
Annuity Protection
Higher Payments for Low Life Expectancy
Invested Annuities
Purchased Life Annuities
Fluctuations in Annuity Rates
Table 10: Top Available Annuity Rates by Annual Income by Sex and Age (£), August 2003
Table 11: Top Available Annuity Rates by Annual Income by Sex and Age (£), September 2006
Table 12: Top Available Annuity Rates by Annual Income by Sex and Age (£), September 2008
Tiny Pots
Table 13: New Premiums Paid for Pension Annuities and Income Drawdown in the UK (£m and %), 2002-2006
KEY POINTS
5. Equity-Release Plans
THE HOME AS A PENSION
SAFETY FIRST
Table 14: The UK Equity-Release Market by Lifetime Mortgages (number, £m and %), 2004-2007
Table 15: Equity-Release Lifetime Mortgages and Home-Reversion Plans in the UK by Value (£m and index H1 2004=100), 2004-2007
ADVERTISING PATTERN
LOOKING AHEAD
KEY POINTS
6. Wealth Management and Inheritance-Tax Planning
DEARTH OF CURRENT STATISTICS
OVER-RELIANCE ON PROPERTY
MINORITY INTEREST
HOLISTIC ADVICE
KEY POINTS
7. Long-Term Care, Life, Medical and Funeral Insurance
THE ENORMOUS COSTS OF CARE
MEDICAL INSURANCE FOR SENIORS
LIFE AND DEATH
KEY POINTS
8. Advertising and Promotion
PENSIONS
Table 16: Main Media Advertising Expenditure on General/Multi-Product Pensions (£000 and %), Year Ending June 2008
EQUITY-RELEASE PRODUCTS
Table 17: Main Media Advertising Expenditure on Equity-Release Products (£000 and %), Year Ending June 2008
OVER-50S LIFE COVER
Table 18: Main Media Advertising Expenditure on Over-50s Life Protection (£000 and %), Year Ending June 2008
OTHER PRODUCTS FOR THE OVER-50S
Table 19: Main Media Advertising Expenditure on Selected Financial Products Specially Targeted at the Over-50s (£000), Year Ending June 2008
ADVERTISING TRENDS
Table 20: Trends in Main Media Advertising Expenditure on Selected Pre-Retirement and In-Retirement Financial Products (£000 and %), Years Ending June 2004-2008
REACHING THE OLDER CUSTOMER
Table 21: Financial Supplements of Saturday and Sunday Newspapers — the Most Widely Read in the UK (000 and %), Year Ending June 2008
KEY POINTS
9. An International Perspective
THE CONTEXT FOR PLANNING
EUROPE
Public-Sector Costs
Table 22: Spending on Old-Age Benefits Across the EU (% and PPS), 2005
Looking Ahead
Germany
Italy
France
LOOKING AHEAD OUTSIDE EUROPE
The US
Australia
New Zealand
Singapore
The People's Republic of China
Conclusion
KEY POINTS
10. PEST Analysis
POLITICAL AND ECONOMIC FACTORS
Pain for Middle Britain
Under-35s do not Save
Injurious Debt
Low Participation in Pensions
Table 23: Income Distribution in the UK by Annual Post-Tax Income by Percentile (£), 1999/2000, 2004/2005 and 2005/2006
SOCIAL FACTORS
More Variety, Bigger Role for Extended Families
Changes
TECHNOLOGICAL FACTORS
KEY POINTS
11. Consumer Dynamics
FUNDING DILEMMAS
Table 24: Summary of Results (% of respondents), 2008
THE FINDINGS IN DETAIL
"National Insurance Contributions Should be Raised to Pay for a Higher State Pension"
"The Income-Tax Rate for High Earners Should be Raised to Pay for a Higher State Pension"
Table 25: Attitudes Towards Increasing National Insurance Contributions and Income Tax for High Earners to Pay for a Higher State Pension (% of respondents), 2008
"In Future, People will Need to Work into their 70s if they are to Avoid Poverty in Retirement"
"Employers are Reluctant to Take on Workers who are Over 60"
Table 26: Attitudes Towards Working People Working Beyond the Age of 60 (% of respondents), 2008
"I am More Preoccupied with Repaying a Mortgage and/or Debts than with Trying to Save for the Future"
"It is not Worth Trying to Save a Lot of Money Because you Lose Entitlement to Means-Tested Benefits"
Table 27: Attitudes Towards Saving for Retirement (% of respondents), 2008
"Children Should no Longer Expect to Receive a Financial Inheritance from their Parents"
"I Think That Inheritance Tax Should be Abolished"
Table 28: Attitudes Towards Inheritance for Children, and the Abolition of Inheritance Tax (% of respondents), 2008
"The NHS Should Pay for Elderly Ill and Disabled People to Live in Nursing Homes"
Table 29: Attitudes Towards the NHS Paying for Elderly Ill and Disabled People to Live in Nursing Homes (% of respondents), 2008
"I Would Describe Myself as Financially Well Off"
"I Would Describe Myself as Unable to Pay all my Bills on Time"
Table 30: Attitudes Towards Personal Finances (% of respondents), 2008
"I Worry That I Will Not Have an Adequate Income as I Grow Older"
Table 31: Concerns Over Future Income (% of respondents), 2008
"Information About Financial Services is Confusing"
"I Find Personal Finance Boring"
Table 32: Attitudes Towards Financial Services and Personal Finance (% of respondents), 2008
"I am Confident that Banks, Insurance Companies and Other Providers of Financial Services are Effectively Regulated, so that Consumers are Protected"
"I Pay More Income Tax Now That the 10 Pence Rate has Been Abolished"
Table 33: Confidence in Financial-Services Providers, and Those Paying More Income Tax (% of respondents), 2008
KEY POINTS
12. Company Profiles
INTRODUCTION
Consolidation and Specialisation
AEGON
Corporate Strategy
Advertising and Distribution
Profitability
Future Company Developments
AVIVA (NORWICH UNION)
Corporate Strategy
Advertising and Distribution
Profitability
Table 34: Financial Results for Aviva PLC (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
AXA GROUP
Corporate Strategy
Advertising and Distribution
Profitability
Table 35: Financial Results for AXA Sun Life PLC (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
CANADA LIFE LTD
Corporate Strategy
Advertising and Distribution
Profitability
Table 36: Financial Results for Canada Life Ltd (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
FRIENDS PROVIDENT PLC
Corporate Strategy
Advertising and Distribution
Profitability
Table 37: Financial Results for Friends Provident PLC (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
HBOS PLC
Corporate Strategy
Advertising and Distribution
Profitability
Table 38: Financial Results for Clerical Medical Investment Group Ltd (£000, number and %), Years Ending 31st December 2005-2007
Table 39: Financial Results for HBOS PLC (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
HOME & CAPITAL TRUST LTD
Corporate Strategy
Advertising and Distribution
Profitability
Table 40: Financial Results for Home & Capital Trust Ltd (£000, number and %), Year Ending 31st October 2005 and 78 Weeks Ending 30th April 2007
Future Company Developments
KEY RETIREMENT SOLUTIONS LTD
Corporate Strategy
Advertising and Distribution
Profitability
Table 41: Financial Results for Key Retirement Solutions Ltd (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
LEGAL & GENERAL GROUP PLC
Corporate Strategy
Advertising and Distribution
Profitability
Table 42: Financial Results for Legal & General Group PLC (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
LIVERPOOL VICTORIA
Corporate Strategy
Advertising and Distribution
Profitability
Future Company Developments
LLOYDS TSB GROUP PLC
Corporate Strategy
Advertising and Distribution
Profitability
Table 43: Financial Results for Scottish Widows PLC (£000, number and %), Years Ending 31st December 2005-2007
Table 44: Financial Results for Lloyds TSB Group PLC (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
PRUDENTIAL PLC
Corporate Strategy
Advertising and Distribution
Profitability
Table 45: Financial Results for Prudential PLC (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
THE ROYAL LONDON MUTUAL INSURANCE SOCIETY LTD
Corporate Strategy
Advertising and Distribution
Profitability
Table 46: Financial Results for The Royal London Mutual Insurance Society Ltd (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
SAGA SERVICES LTD
Corporate Strategy
Advertising and Distribution
Profitability
Table 47: Financial Results for Saga Services Ltd (£000, number and %), Years Ending 31st January 2006-2008
Future Company Developments
STANDARD LIFE PLC
Corporate Strategy
Advertising and Distribution
Profitability
Table 48: Financial Results for Standard Life PLC (£000, number and %), Years Ending 31st December 2005-2007
Future Company Developments
ZURICH FINANCIAL SERVICES
Corporate Strategy
Advertising and Distribution
Profitability
Future Company Developments
KEY POINTS
13. The Future
NASTY NUMBERS
ECONOMIC RESTRUCTURING
Table 49: Changes in Employment by Industry (000), June 1997 and February 2008
DREAMS AND REALITY
LEGISLATION
MULTI-DIMENSIONAL POLICIES
KEY POINTS
15. Further Sources
Associations
Publications
General Sources
Government Sources
Other Sources
Bisnode Sources
AEGON
AVIVA (NORWICH UNION)
AXA GROUP
CANADA LIFE LTD
FRIENDS PROVIDENT PLC
HBOS PLC
HOME & CAPITAL TRUST LTD
KEY RETIREMENT SOLUTIONS LTD
LEGAL & GENERAL GROUP PLC
LIVERPOOL VICTORIA
LLOYDS TSB GROUP PLC
PRUDENTIAL PLC
THE ROYAL LONDON MUTUAL INSURANCE SOCIETY LTD
SAGA SERVICES LTD
STANDARD LIFE PLC
ZURICH FINANCIAL SERVICES
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