Retirement has always been about much more than choosing the right annuity and the Chancellor has now brought that fact into stark relief.
George Osborne has not only removed one of the biggest barriers to investing in a pension in the first place, he has also encouraged every part of financial services to stop thinking product and start thinking customer.
The decision will have forced annuity providers to answer some fundamental strategic questions such as “What customer needs should we really be meeting?” and “Are our products, services, sales and marketing appropriate now that no annuity from now on will be a grudge purchase?”
Those annuity companies that are well-capitalised and able to swiftly and genuinely respond to these questions will prosper – even if it is rather painful in the short term.
Some pundits are predicting that the annuity market may swiftly shrink to a third of its size. Others think it will be more dramatic. If this is true, it says something rather fundamental about the products our industry has been selling up until now. From now on, the industry will only be offering the sort of income generating vehicles that people want to buy – stand by for a swathe of product and service innovation.
It is of course great news for investment and pension companies. And financial advisers. In fact I think it is great news for the country as a whole; genuine encouragement for us all to save for our post-full-time-working lives.
The next step is one I recommend we do without Government intervention – try to minimise the use of the word “retirement”. It is anachronistic, misleading and laden with implications that are inaccurate and off-putting for an increasing numbers of customers.
The dictionary definitions of “retirement” include “removal or withdrawal from service” and “withdrawal into privacy or seclusion”. It sounds like a prelude to death, rather than the start of an exciting new chapter.
In fact, “retirement” is bad for your health. A study by the Institute for Economic Affairs in 2012 found that retirement appears to trigger a drastic long-term decline in people’s physical and mental health. Retired people are 40 per cent less likely to assess themselves as being in “very good” or “excellent” health than people the same age who had not yet retired, and 40 per cent are more likely to be suffering from clinical depression.
So instead of talking about “retirement” or “approaching retirement” or “at retirement” or “post-retirement”, how about we look at the whole thing from a completely different angle. What we should be talking about is helping clients to live the second half of their lives. This isn’t “retirement”; this is financial planning for the next 45 years. And there is a massive difference between the two.
The former (up until last week) involved handing over your life savings to an insurance company in return for a small income for the rest of your life. The latter is about cracking on with living life in your approaching decades. This may involve working part-time. It may include starting your own business. It may involve travel. It is certain to involve health care, fitness and long-term care. Hopefully, it will involve IHT planning.
Forty-five is the age when a large number of people actually start to save. The day when their kids will be (relatively) financially independent is close at hand, the mortgage is reducing at an increasing rate of knots and they can see another 20-30 years of income ahead of them.
The need for financial advice is obvious. But it also opens up a myriad of opportunities for investment platforms, fund managers and life companies. They used to wave goodbye to clients as they withdrew billions of pounds worth of pension money to purchase annuities. Fewer clients will now follow this route. Mass withdrawals from pensions and Sipps will start to slow. Those “accumulation” firms that invest in genuine customer insight, get close to their clients and start to meet their needs with innovative products and services (and as we have explored above, we are not just talking about financial needs) will have the opportunity to forge lucrative client relationships for decades to come.
It is now all to play for. The ‘product goggles’ are off. The client has moved to centre stage. George Osborne’s budget speech could mark the beginning of an exciting new chapter in UK financial services.
Campbell Macpherson is managing director of consultancy Campbell Macpherson & Associates and has held executive roles in Openwork, Zurich and Sesame