British insurer Aviva has agreed terms on a deal to acquire smaller rival Friends Life for £5.6bn, as Chancellor George Osborne's pension reforms put pressure on insurance firms to find new business.

Aviva's all-share bid for every Friends Life share implies a 15% premium to the latter's closing price on 21 November.

The board of Friends Life has indicated it will recommend the offer, which equates to 399p per Friends Life share, to shareholders, the companies said in a statement.

Under the terms of the offer, Friends Life shareholders will own 26% of the combined group. They will also receive an amount in cash equal to any Friends Life final dividend for the 2014 financial year.

When combined, the London-traded firms will command a valuation of around £20.5bn ($32.1bn, €25.9bn) at Friday's market close. The new firm will begin with 16 million customers and will be the UK's largest insurance and savings business.

The offer was announced after the stock market closed. Aviva's stock has gained some 20% so far this year while Friends Life's stock has shed about 1.8% this year.

Brokerage Panmure Gordon downgraded Aviva following the announcement.

Panmure analyst Barrie Cornes said in a note: "Whilst there will be some cost synergies and it could accelerate Aviva's dividend paying capability, it is also at odds with management's previous comments about Aviva being too UK-centric."

UK Pension Freedoms

Up to 200,000 pension investors are set to cash in their retirement savings next year, landing the Treasury with a tax windfall of up to £1.6bn, according to a poll by Ipsos Mori for Hargreaves Lansdown.

The survey, which questioned 1,247 people, comes after Osborne unveiled a raft of pension freedom reforms in his 2014 Budget.

The legislation means that, among other things, defined contribution (DC) pension (roughly based on how much an employee pays into a pot) investors over the age of 55 will be able to take their pension out as a lump sum from April 2015, rather than paying for an annuity.

The study found 12% respondents with a DC pension said they will take advantage of the new freedoms and withdraw all of their pension in one go.

But the research also revealed only 38% can accurately state how much tax would be deducted from a medium-sized pension pot – the proportion who can accurately predict what rate of tax would be applied to large pension pots falls to 6%.

Friends Life was founded in 2008 by entrepreneur Clive Cowdery.