As we all return to work after the summer break, the realities of the new world of retirement options are staring us in the face.
The issues facing insurance companies that need to innovate their annuity and drawdown products have been widely discussed. But what about those facing professional advisers? There will be many opportunities but there will also be many challenges.
The most obvious opportunity is to offer more sophisticated retirement income advice for existing clients and to attract new clients who might not have sought advice before. This raises two questions; what additional skills will advisers need, and how will they attract new clients?
In a paper to be published shortly, I make the point that retirement advice is more of a journey than an event and while most advisers probably have good advice processes, they will benefit from being better prepared for the advice journey ahead. They can do this by having a better understanding of the tools of the trade.
These include an understanding of the key annuities and retirement issues and in-depth product knowledge.
Annuities may not be the most fashionable of topics but they are still the only products that can guarantee a relatively high level of income for life. Capacity for loss will play an increasingly important role as more clients with modest funds find themselves attracted to drawdown. If they do not understand the risks and cannot accommodate a potential fall in income if things go wrong, there may be a lot of unhappy pensioners in the future.
The advice for higher-net-worth clients will not change fundamentally but advice for mass-affluent clients will. Many of these would have purchased annuities in the past but will now be attracted to the new pension freedoms. However, when taken through a structured advice process, they may conclude that taking their pension as a lump sum does not make sense because of the tax consequences.
As the complexity and cost of providing advice to the mass affluent market becomes clearer, the question may not be how many new clients can we attract, but how do we attract the right type of client?
If a significant number of people start their journey into retirement by taking advantage of the Government’s free guidance service, advisers will need to find a way of tapping into this. Perhaps they will use the output from the guidance session as their starting point. It is early days but advisers who want to attract new clients will have to figure out how to compete with the guidance service and how to work alongside it.
With all the focus on the new pension freedoms, the recent cuts in annuity rates have gone largely unnoticed. Since 1 July, annuity rates have fallen by around 4 per cent, which translates into £200 per annum less for a £100,000 purchase.
Annuity rates have fallen on the back on falling gilt yields. The yield was 3.16 per cent at the beginning of July but is 2.71 per cent now. As the table shows, this 45 basis point fall has resulted in an average cut of 4 per cent.
Annuity sales may have halved since the budget but this does not mean that advisers can ignore the trend for annuity rates. There is still a strong case for annuities when a guaranteed income is the priority.
If bond yields rise back above the 3 per cent mark, we can expect annuities to increase. In the meantime, this sudden and unexpected fall highlights the dangers of deferring annuity purchase. If yields do not recover or fall even further, those who have delayed taking their pension income and subsequently decide that an annuity is the right option may find that the wait has resulted in lost income.
Billy Burrows is associate director at Key Retirement Solutions and director at Retirement Intelligence