After last year’s sweeping changes to the UK pension system, Britain’s biggest insurers are facing yet another wave of pension reforms and changes to tax relief rules.
Life insurers and savings providers Prudential (LSE: PRU), Legal & General (LSE: LGEN) and Aviva (LSE: AV) took a hit last year when the Chancellor announced that he was scrapping compulsory annuities in what was the largest pensions overhaul for more than 90 years. And now, the Chancellor has begun consulting on whether to treat retirement pots in a similar way to individual savings accounts (ISAs).
At present, savers receive tax relief when they pay into a pension pot but are then taxed when the money is drawn as a pension. The proposed reforms would reverse this. Contributions would be taxed as normal while pension payouts would be tax-free.
These changes would do more than just shake up the pension system. Pensions would, to a certain extent, lose their retirement savings status — the line between retirement savings and regular investments would become blurred.
Analysts believe that this change would have two effects. Firstly, competition would increase dramatically as non-traditional pension providers entered the market. And secondly, it’s expected that overall inflows into pension products would increase.
Polarise the industry
City analysts also believe that these two changes will polarise the pensions industry. Traditional pension providers will suffer while managers like Aviva, Legal & General and Prudential, which have invested heavily in fund management divisions, will benefit.
What’s more, these providers have economies of scale. Aviva, for example, is the UK’s largest pension savings and annuities provider, allowing the group to achieve profit margins above the industry average. Legal & General is the biggest manager of UK pension assets, and Prudential has built a reputation as one of the most efficient pension managers.
These traits will help Prudential, Legal & General and Aviva pull ahead of the pack if new pension rules come into force. Not only will these companies be able to offer the best package for the best price to consumers, their size and diversification will help convince potential customers that they provide the best value for money.
Even if the proposed pension changes aren’t made into law, Legal & General, Aviva and Prudential will remain great long-term investments. Managing pensions, savings and life insurance is a long-term process that takes plenty of skill to get right. Luckily, these companies have perfected the process over the past 200 years.
Moreover, the three pension providers are all income plays. Legal & General currently supports a dividend yield of 4.9% and Aviva supports a yield of 3.9%.
Unfortunately, as Prudential’s earnings are expected to grow by 13% this year, the company trades at a premium forward P/E of 14.4 and only yields 2.5%. However, sometimes you have to pay a premium for quality.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.