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* Annuity market worth an estimated 15 bln stg a year
* UK to scrap requirement for retirees to buy annuity
* Other products seen unlikely to make up for lost business
By Chris Vellacott and Jemima Kelly
LONDON, March 20 (Reuters) - Britain's insurers will losecontrol of a market worth 15 billion pounds ($25 billion) a yearunder a surprise pension reform announced by the government, andwill struggle to make up the hit to profits any time soon,according to analysts.
Finance minister George Osborne unveiled a far-reachingshake-up of the pensions system in his annual budget onWednesday aimed at boosting choice and returns for pensionerswho have seen their incomes hit by record low interest rates.
For the first time, all retirees will be free to do whatthey want with their pension pots, scrapping a system that madeit compulsory for most of them to buy an annuity, where theyexchange pension savings for a regular income.
This dismantles a captive market for annuity providers suchas Legal & General and Resolution, which willnow have to compete for pensions business against otherinvestment products. Their shares dropped sharply on Wednesday,and analysts see little prospect of a rapid recovery.
"This radical piece of legislation will destroyprofitability in the highly lucrative annuity market, in ourview," said RBC Capital Markets insurance analyst Gordon Aitken.
According to Bernstein Research, about 75 percent ofretirees purchase an annuity, with current rules obliging themto do so if their retirement savings are between 18,000 poundsand 310,000 pounds.
After the reforms, the annuity market for individuals couldshrink by up to half, the firm forecast.
Many of Britain's biggest insurers have been puttingannuities at the heart of their business, as more Britons retirewith so-called defined benefit pension schemes, rather thanfinal salary schemes where employers are responsible forproviding a guaranteed retirement income.
"There is a negative implication for new business flows inthe individual annuity market, as some people utilise theincreased flexibility provided by the ... (government's)proposals," Resolution said in a statement on Thursday.
RBC analysts said Legal & General (L&G) was the most exposedto annuities of the British insurers it covers, with itsretirement division providing 29 percent of group cash in 2013.
L&G generated a net 1 billion pounds of cash in 2013.
QUICKER THAN EXPECTED
Many large annuity providers said they could benefit fromthe changes in the pension rules, pointing out that thegovernment's budget was designed overall to offer incentives tosavers, and more saving would boost the fund management andinvestment businesses run by the same companies.
Big life insurance groups Aviva, L&G, Prudential and Standard Life all run large asset managementarms, which will also be likely to take in much of the pensioncash that would have gone automatically into their annuities.
But analysts at credit rating agency Fitch, which estimatesthe annuity market is worth 15 billion pounds a year, said lessnew annuities business could mean lower profits.
"Companies offering alternative products for pensioners tomanage and access their pensions would benefit. But we believethese products would typically generate lower profits thanannuities," they said in a research note.
Most exposed are likely to be specialist insurers such asJust Retirement and Partnership Assurance, bothof which offer so-called enhanced annuities to people with lowerlife expectancy.
"These two companies have grown fast, taking a large shareof the rapidly developing market for enhanced annuities. Theproposed reforms could seriously threaten their growth prospectsand potentially lead to a significant reduction in theirbusiness," the Fitch analysts said.
The enhanced annuities market represented 28 percent of allannuity purchases in the last three months of 2013, up from 2percent in 2003, the Association of British Insurers said.
Partnership Assurance shares halved in value on Wednesdayand were down a further 9 percent on Thursday. Just Retirementstock was down a similar amount, having also plunged onWednesday.
Insurers had been expecting some reform to annuities. Withabout half of retirees last year buying an annuity with apension pot of less than 20,000 pounds, and annuity rates havingfallen by a half over the last 15 years, they currently offer avery low income for most people.
"In theory, this is a logical step," said one industryinsider at a large insurer of the reforms, speaking on conditionof anonymity.
"But is it quicker than anyone expected? Well definitely. Isit what people forecast would happen straight away? No."
($1 = 0.6014 British Pounds) (Editing by Mark Potter)
