UK insurers and fund firms battle it out for pensioners' cash

(Repeats story published on Tuesday, with no changes)

* Budget changes forcing savings industry shake-up

* Savers free to shun annuities, spend how they like

* New insurance products slow to arrive

* Fund managers offering target-return funds

By Simon Jessop and Carolyn Cohn

LONDON, Nov 25 (Reuters) - Billions of pounds in savings that retiring British workers would have swapped for an income for life are up for grabs after recent rule changes - and fund managers are battling insurers for a slice of it.

Surprise reforms announced by the government this year mean Britons are no longer forced to buy a guaranteed income - an annuity - at retirement, so savers can do what they like with their money when the rules take effect in April.

The choice currently facing retirees is largely between buying an annuity - where the insurer takes on the risk that markets slump or you outlive your money - or some form of "drawdown" product, where the pensioner takes out some of their pension every year and manages it themselves.

Annuity payouts on offer to pensioners have slid since the onset of the financial crisis in tandem with declining interest rates, and are expected to be depressed for several years.

Demand for the high-margin products more than halved in the third quarter to 1.5 billion pounds, in anticipation of the new rules, while the drawdown market - far less profitable for insurers - nearly doubled, industry data showed.

To survive in the new order, insurers are scrambling to create more flexible products combining elements of both, for retirees with an average pot of money - 25,000-60,000 pounds ($40-90,000).

At the same time, asset managers have been keenly monitoring how much money is pulled out of insurance products in favour of their stock and bond funds, and are increasingly offering funds which target a specific return - an attractive option for pensioners.

"Today, if you retire at 60, you're likely to live for at least another 20 years, so you probably need to retain some exposure to growth via equity markets, at least initially, and then later on you may choose to annuitise, or look for a form of guaranteed return," said Edward Houghton, insurance analyst at brokerage Sanford Bernstein.

The decline in the annuities market has been a bitter blow to insurers. Annuities could give them a margin of 10 percent, while drawdown products typically deliver 1-2 percent.

The upheaval is seen as a major factor behind the planned 5.6 billion pound tie-up between Aviva (Other OTC: AIVAF - news) and Friends Life , and comes as annuities face regulatory scrutiny for offering poor returns.

REWARDS

Most drawdown products are offered by insurers, although investment platform Hargreaves Lansdown (LSE: HL.L - news) and others such as AJ Bell provide similar products to those who invest their pension money themselves.

While there was "a lot of head scratching" about what new products could be developed, few had been yet, said Tom McPhail, head of pensions research at Hargreaves Lansdown.

He cited some examples, however, such as variable annuity-type products from the likes of Metlife (NYSE: MET - news) , which convert part of their savings into a guaranteed income, while leaving some to invest.

Just Retirement (LSE: JRG.L - news) is also planning a similar product, finance director Simon Thomas said.

Legal and General finance chief Mark Gregory said it, too, expected to have a range of products available. It is also looking at offering lifetime mortgages, which enable pensioners who own homes to release equity from the assets, which is then paid back when they die.

Meanwhile asset managers, while unable to offer a guarantee, are hoping to attract customers with the lure of higher returns.

A favoured option for retirees is likely to be funds that target a specific return, say by beating inflation by 2 percent after fees.

British target-return funds held $3.4 billion at end-October and had taken in $120 million since March, Lipper data showed.

Asset managers are facing pressure on fees from several directions, including low-cost passive funds, where charges can be as little as 0.3 percent, and a regulatory drive to cap the cost of investing money on behalf of pension schemes at 0.75 percent. Target (NYSE: TGT - news) -return funds, however, can earn them fees of around 1.5 percent.

Fund firms may have to take a fee hit to get their retirement-focused funds recommended to retail investors through a platform such as Hargreaves Lansdown, said Sanford Bernstein's Houghton.

Most though will want to try, given the rewards on offer.

David Hutchins, head of multi-asset pension strategies at Alliance Bernstein, cited client research conducted by the firm showing more than 80 percent of people intended to keep their money invested in some way after retirement.

"The question is, is that in an asset management product, an insurance product or a bank account?" (Additional reporting by Nishant Kumar; Editing by Pravin Char)