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Why Shares in Legal & General Group Plc, Resolution Limited and Aviva plc Plummeted

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Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: The chancellor, George Osbourne, announced that pensioners will no longer be required to take out an annuity in order to remove money from their pensions. This revelation, in today’s Budget, rocked some of the UK’s biggest insurers.

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At the time of writing shares in Resolution (LSE: RSL) are down 12%, while Legal & General (LSE: LGEN) (NYSE: LGGNY.US) is down 11% and Aviva (LSE: AV) (NYSE: AV.US) shares are 7% cheaper.

So what: The chancellor stated:

“I am announcing today that we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots.”budget

“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits.”

“”Let me be clear. No one will have to buy an annuity.”

Now what: So, first of all, what is an annuity? Simply, it’s a financial product, sold by the likes of Resolution, Legal & General and Aviva, that converts your pension savings and provides regular income in retirement.

Around 420,000 annuities are sold by insurers and specialist companies yearly. They are sold at different rates: for instance, a £100,000 pension pot, with an annuity rate of 5%, would provide an income of £5,000 a year.

The annuity market — worth £12bn a year — has been accused of working against consumers, who unwittingly entrust their lifetime savings with pension companies.

Today’s reforms were not expected by the industry and will curtail a lucrative revenue stream.

As far as valuations go, based on forecast earnings shares in Legal & General and Aviva now trade on price/earnings ratios of 13 and 11 respectively, while Resolution’s dividend — one of the FTSE’s biggest yields, with only thin cover — could come under threat.

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Mark does not own shares in any company mentioned.

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