The UK annuities market could decline by up to 75% after the recently announced changes to compulsory annuity purchase come into effect, according to PwC analysis supported by a new consumer survey.
The survey, which looked at consumer behaviour of people aged 50-75, reveals that 63% of consumers have or intend to ask for financial advice from an IFA on how they will access their pension pot.
But PwC UK insurance leader Jonathan Howe warned many consumers may not have a big enough pension pot to justify significant advice fees, particularly since the Retail Distribution Review came in.
He predicted an advice "black hole" as a result.
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He said: "It was clear that life insurers were in for a shake-up following the recent annuity announcements, but our survey quantifies the scale of the effect on the life industry.
He said: "People still want to invest a small part of their pension pot in an annuity, but it's crucial that insurers offer innovative new products to satisfy their customer demands and to fill the hole left by up to a 75% fall in annuity sales."
The 75% annuities market decline was calculated by comparing the estimated proportion of vested pension pots used to purchase annuities in 2013 (assuming 25% taken tax-free) and the proportion that consumers in the survey said they will use to purchase an annuity following the Government's changes.
Mr Howe said: "63% of consumers have or intend to ask for financial advice from an IFA on how they will access their pension pot, which is likely to account for the low ranking in importance of having a simple product.
"However, the key point here is that many consumers may not have a big enough pension pot to justify significant advice fees, particularly as since the Retail Distribution Review came in last year IFAs now have to charge fixed service fees to customers.
"What we will see is an advice 'black hole' – a supply gap between what consumers want and what they can get. The Government's free guidance will no doubt have its limits, and consumers will turn to their product providers for help in deciding what to do.
"This is a good opportunity for financial institutions to react to customers and to offer new products and services that suit their needs.
"Our survey shows that over 50% of people still want to buy products offered by financial institutions, and given the key focus on guaranteed income for life, insurers' expertise in the area of longevity risk will be key."
Results also show that the most important factors for consumers deciding how to manage their pension pot are having the certainty of a guaranteed income for life, followed by tax efficiency.
Having a simple and understandable product ranked surprisingly low, just higher than dependants having security after death, which respondents considered their lowest priority.