Has the market overreacted to the Budget’s impact on UK insurers? Perhaps yes...

As I am putting metaphorical pen to electronic paper, UK life insurers are getting well and truly clobbered following the pension changes unveiled by Chancellor George Osborne in today’s UK Budget.

Insurers suffer precipitous share price falls

The annuity specialist Partnership Assurance has lost 52% so far today, while life insurer Legal & General has dropped over 13% and Standard Life over 6%. The trigger for these precipitous share price declines has been the announcement that pensioners will no longer need to take out an annuity with their private pensions when they take retirement, but will instead be take out as much from their private pensions as they like, without restriction.

The situation prior to today

Without going into too much detail, as I am not a tax adviser but rather an investor, let’s recap the situation prior to today. A prospective pensioner with a defined contribution (also called “money purchase”) private pension could take 25% of their private pension out in cash tax-free at the time of retirement – as has been the case now for many a year.

No more annuities?

The Chancellor’s pronouncement today, releasing pensioners from restrictions on their private defined contribution pensions, has been translated into a collapse in the future demand for annuities, as pensioners will now be able to withdraw as much as they like from their private pensions. Of course, this pension income will be treated as taxable income, potentially raising much-needed further income tax revenues for the HM Revenues & Customs.

This has been quickly translated by the stock market as: “There is no further need for annuities, and therefore demand for annuities is going to dry up”.

To read the rest of this article, including the two insurers where the stock market has overreacted, click on this Mindful Money link: 

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