The life insurance industry is facing potentially radical changes under the new government’s agreement on taxation and retirement provision, analysts said.

Executives and analysts are divided over how big an impact the moves might have on an industry that already struggles to achieve growth in business from a population that is much more attracted to borrowing than saving.

The most explicit commitment to affect the industry from the Conservative-Liberal Democrat agreement was to end the practice whereby retirees are compelled to purchase an annuity at the age of 75, turning their savings into income that lasts until their death.

However, there are other changes on capital gains tax and potential changes to tax relief on pension contributions that will also affect the life and pensions industry. Only the very wealthy who have pension savings significantly above the average are expected to have the freedom to choose retirement income products other than annuities, according to analysts.

The change could still be painful for companies such as Legal & General, Prudential and Aviva that sell a lot of annuities, but could be a boon to those who focus more on self-invested pension plans (Sipps), according to analysts.

“This is likely to be negative for those companies that are more heavily reliant on annuity profits, but positive for those specialising in Sipps and income drawdown policies [such as St James’s Place and Standard Life],” said Oliver Steel at Deutsche Bank.

Toby Langley at Bernstein Research thinks this will mean a floor being set at about £100,000 ($146,149) of pensions savings, which compares with the typical retirement fund of £25,000. This could mean a loss for the industry of just 3 per cent of business by number of policies, but up to 26 per cent by volumes of funds.

“This limitation would be needed to prevent pensioners with lower-sized pots spending their savings on Caribbean cruises and then applying for the state pension once the money had run out,” he said.

The bigger worry for the industry, according to Mr Langley, is that the coalition could further reduce pensions tax relief in order to pay for the Lib Dems’ desired increase in income tax allowances. The original Lib Dem plan to pay for this was to introduce a flat 20 per cent tax relief on all people paying higher rate tax, that is up to 3m people.

“We estimate that half of all pension contributions are sourced from these higher rate tax payers and so such a disincentive could be very damaging to the UK pensions market,” he said.

The capital gains tax change, meanwhile, could prove a boost to sales of savings bonds, which dropped by 65 per cent in the two years following the cut in CGT made towards the end of 2007.

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