MP65204

MAPS : Financial Services to the over 60s : 2004

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This report covers: annuities, equity-release plans, wealth management, inheritance tax, planning, roll-up interest, long term care, funeral insurance,

Companies covered include: Prudential, Northern Rock, Abbey National, Allianz Cornhill Insurance, Aviva, Axa Sun Life, Britannic Group, GE Life, Key Retirement Solutions, Legal & General Group, Saga Services, Towry Law, The Post Office and National Savings, Alliance & Leicester, Barclays, HBOS, HSBC Holdings, Lloyds TSB, Royal & Sun Alliance, Insurance, Royal Bank of Scotland, Zurich Financial Services, Nationwide Building Society, Standard Life - Mutual,

EXECUTIVE SUMMARY

Executive Summary

STRATEGIC OVERVIEW

The over-60s make up a conservative market, relatively resistant to high consumer spending, but increasingly forced to borrow because many have inadequate pensions.

While a large proportion of pensioner households have low incomes, ironically, the retired account for the majority of wealthy Britons.

Women own well over half of the net capital wealth of the over-65s, despite considerably lower earnings during their working lives — this is the wealthy widow effect.

The affluent elderly are difficult to influence, as they have made up their minds on many issues. They tend to travel extensively beyond the UK and often prefer to place their finances in the hands of companies with global reach.

ANNUITIES

Low annuity rates discourage individuals from investing in pension funds. Most rates fell by over 20% between August 2000 and August 2003.

For people earning less than £11,200 per year, pensions saving under the current regime is not financially worthwhile.

Current low pensions saving is likely to restrict future demand for annuities.

Advertising for annuities is extremely limited. The highest spender in the year ending June 2003 was Britannic Retirement Solutions.

EQUITY-RELEASE PLANS

The equity-release market doubled between June 2002 and June 2003 and could exceed £1bn in new loans for the full year 2003.

Mortgage equity-release plans will be regulated from 2004, although home-income and home-reversion plans will remain unregulated to the detriment of customers.

Competition in the sector is growing. Norwich Union, Prudential, Northern Rock, GE Life and Britannic Retirement Solutions are among the leading providers.

WEALTH MANAGEMENT AND INHERITANCE TAX PLANNING

Conservation of their capital is the top financial priority for pensioners.

The very wealthy, with assets considerably in excess of £255,000, are able to bypass inheritance tax with careful planning; however, future governments are likely to make tax avoidance more difficult.

Older investors who have lost money on precipice bonds are cautious about taking out new investments.

LONG-TERM CARE, LIFE, MEDICAL AND FUNERAL INSURANCE

The long-term care insurance market is still very small. AXA's PPP and BUPA lead the sector.

Self-pay treatment at fixed prices is often more affordable than private medical insurance (PMI) for the over-60s.

Whole-of-life insurance is, at present, an effective means of limiting or avoiding inheritance tax.

COMPANY DEVELOPMENTS

Special or Niche Focus on the Over-60s

Financial organisations with a sharp focus on the elderly fall into four main categories:

insurers

former building societies

advisers and repackagers, e.g. Key Retirement Solutions and Saga Services

the State, through National Savings and the Post Office.

Companies Without a Focus on the Over-60s

The main clearing banks, while including the over-60s as customers, do not have such a well-defined emphasis on this sector as the insurers do.

The major banks tend to be slow innovators, although they buy up profitable ventures when it appears that profits are assured.

PROMOTION

Cornhill Direct and Saga Services are the leading advertisers of financial services for the retired and soon-to-retire.

Advertising for equity release has been muted, despite older consumers' interest in the market.

Few of the over-65s log on to the Internet and, therefore, online advertising is not yet an effective means of persuading this age group.

AN INTERNATIONAL PERSPECTIVE

Despite the lead set by the US, the UK is not likely to abolish inheritance tax.

Harmonisation of regulation and tax for non-domestic funds throughout the Eurozone should enable fund managers to achieve economies of scale and, possibly, deliver higher returns to customers. However, the UK is not likely to join the Eurozone in the immediate future.

International all-in-one accounts for the retired, including annuities, income bonds, an equity-release option and healthcare insurance, could become popular products for the elderly.

PEST ANALYSIS

The following effects are the result of political, economic and social issues:

Government policy is leading towards longer working lives.

Property is the new pension fund — while the market is buoyant.

The retired who claim Pension Credit are likely to have greater capacity to buy financial services — although pensioners are reluctant to apply for benefits like this, which are means tested.

CONSUMER DYNAMICS

The majority of adults want larger State pensions, although a much smaller proportion think the well-off should pay more income tax to help fund them.

Significant demand for higher government spending on care for the elderly clashes with a reluctance to see a rise in taxation.

More than a third fear they will have inadequate incomes in old age, although, far fewer think that children should help out their elderly parents by taking financial responsibility for their care.

A large majority of respondents appear to believe that the older generation should retain assets with the sole purpose of passing them on to the next generation.

Some think that people will need to delay retirement into their seventies if they are to avoid poverty, although very few deliberately curb their spending.

People appear to feel some guilt about their neglect of the future.

A relatively small proportion of respondents trust in the regulation of financial-services companies and many find financial services confusing.

Overall, people have unrealistic expectations of the elderly, who are expected to support themselves financially and to help fund the next generation, which is reluctant to take on responsibility for them.

The over-60s are expected to cope financially and to obtain sufficient income to live on, while maintaining ownership of their assets.

THE FUTURE

Inheritance tax contributes a small but rising share of total tax revenues. In the long term, this revenue is likely to fall because the elderly will need to use most of their assets during their retirement.

Although the Government would like individuals to work for more years, many will not be able to do so because of illness or disability.

Stakeholder pensions are not fulfilling the role for which they were introduced. There is pressure from providers for the charge cap to be increased from 1% to 2% per year, although this could damage sales substantially.

Inadequate pension contributions promise penury for future pensioners, unless State benefits go up.

Equity release will expand significantly in the medium term. The alternative — a basic state pension equivalent to at least the Pension Credit income guarantee — might be achieved eventually through pensioner power.

Apart from the profitable but fair expansion of equity release, the challenge for financial-services providers to the over-60s in the coming decade is to develop and market successful integrated multi-purpose accounts that save customers money and make managing their money a simpler task.

TABLE OF CONTENTS

Text © 2004 Key Note

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Last updated by Amanda Porteous November 2004