The UK government's Budget last week will reduce sales and profit margins for UK life insurers, according to credit rating agency Moody's.

Chancellor George Osborne's controversial decision to relax rules forcing people to buy annuities when they retire will significantly reduce sales volumes and margins in annuities for individuals, Moody's said.

Osborne claimed the changes would give people more choice about what they do with their pension pots, but critics say consumers could end up with alternative products that fail to give them an adequate income for their full retirement.

Moody's Vice President and Senior Analyst David Masters said the agency believed individual annuities made up about half of UK life insurers' new business value.

Individual annuities are one of the most profitable lines of business for UK life insurers, but the changes could mean individual annuity sales fall by up to 75%, he said.

"Whilst these changes may ultimately encourage future savings into pension products, we think the changes will significantly reduce sales volumes and margins in the UK individual annuity market, a key driver of future profitability for many insurers," Masters said.

"These changes are credit negative for UK life insurers. First, annuity volumes are likely to decrease significantly, leading to falling value of new business from annuities and, over time, insurers' profits may also fall. Second, competition for retirement products from alternative providers is likely to increase considerably."

Moody's said it expected consumers and the financial services industry to take time to fully adapt to the new regime, as consumers evaluate their wider retirement options and as providers re-evaluate their product range and look to replace annuities.

Whilst insurers are likely to try to capture retirement asset flows through alternative products such as equity ISAs, SIPPs and drawdown products, new business margins and returns on such products are much lower than on individual annuities, cutting insurers' overall profitability, Moody's said.

PW

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