Gregg McClymont: Many of freedoms’ true challenges yet to surface

Gregg-McClymont-NAPF-Conference-700.jpgI sat open-mouthed in the House of Commons four years ago as George Osborne announced the end of a national retirement system based on annuities.

Three years on from the law change, several trends are clear.

First, overall we remain in what I call ‘Income Drawdown’s Phoney War’: as long as the vast majority of retirees have DB pensions alongside their DC pots then the really knotty challenges of decumulation – investment, longevity, and inflation risk – are unrealised. Running out of money is not possible.

Second, this ‘phoney war’ is coming to an end sooner than I expected because of the sheer volume of DB to DC transfer assets. When people with little experience of the financial markets– such as those at Tata in South Wales – place their whole financial future in the hands of an income drawdown portfolio, then the risks have become greater as those billions flow into non-guaranteed solutions.

Malcolm McLean: Pension freedoms guidance is too little too late

Third, buying an annuity in your mid to late 60s on average is inefficient from a financial perspective. This reflects rising life expectancy, which contrary to some recent reports continues to rise.

Fourth, buying an annuity much later in retirement on average makes more financial sense because of rising mortality credits and the ‘smile’ consumption curve, meaning we spend less in our dotage than as new retirees.

Fifth, measuring retirement products by such financial efficiency is beside the point because individuals’ decisions at retirement are motivated by a much wider range of instincts, emotions and beliefs. What academics call the ‘annuity puzzle’ (why don’t people buy annuities) is not a puzzle at all. Nowhere around the world do individuals buy guaranteed products in large numbers unless compelled to do so.

Nick Bamford: Pension freedoms have given clients control

Sixth, the bequest motive is a powerful one and making pensions inheritable has transformed the way in which advisers and their clients approach drawdown. This ‘second act’ of Osborne’s reforms was as revolutionary as the first.

Seventh, as long as interest rates are low, designing sophisticated but not complex guaranteed products is an uphill task for asset managers and insurers.

Finally, no investment strategy can abolish the risk of running out of money. Only spending rules can avoid the crystallisation of investment losses. It’s why good financial advice is utterly critical in drawdown.

Gregg McClymont is head of retirement at Aberdeen Standard Investments



Hot Money: Assessing three years of pension freedoms

As the pension freedoms approach their third anniversary, advisers are reflecting on how the watershed policy has affected both their businesses and their clients. Clients have benefited from being able to access flexible drawdown and to use their pension to help fund inheritance. They are able to transfer out of defined benefit schemes and are […]


Fewer savers using advisers before cashing out pension

Fewer savers are turning to an adviser before fully cashing out their pension, latest FCA figures show. Between April and September 2017, just 32 per cent of full withdrawals were advised, down from 44 per cent the previous year. Nearly all (95 per cent) of the decline in advice was attributed to cash outs for […]


Pension cold-calling ban to start by June

A ban on pensions cold-calling will be put in place by June, following the tabling of new amendments to the Financial Guidance and Claims Bill. Ahead of the Commons report stage of the Bill on 12 March a “new clause 3” allows for the ban to start by the middle of the year. The Government […]


Aegon sets date for Cofunds advised clients move

Cofunds’ advised clients will move to the new Aegon platform over the first May Bank Holiday, with the new platform expected to be up and running by 8 May, Aegon has confirmed. Around 400,000 customers will be moved to the new platform over that weekend. Aegon completed the first stage of moving Cofunds customers onto […]

trevor greetham

Multi asset market views

With the world economy continuing to strengthen, Trevor Greetham, Head of Multi Asset at RLAM provides an update on the positioning of our multi asset funds and the Investment Clock. Watch the video here Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed […]


News and expert analysis straight to your inbox

Sign up


There is one comment at the moment, we would love to hear your opinion too.

  1. A fair summary of what we already know although I’m not quite sure about the conclusions on annuities bought early and late.

    I think it would be interesting to review freedoms in terms of the various risk transfers that are occurring with pension freedoms and the actual size of those risks relative to the public’s perception (eg “well I don’t have to worry about running out by age 80, because I won’t live that long” in combination with “I did a DB to DC transfer because it would be nice to leave something to my kids”)

    Your bit on “What academics call the ‘annuity puzzle’ (why don’t people buy annuities) is not a puzzle at all. Nowhere around the world do individuals buy guaranteed products in large numbers unless compelled to do so” is similarly interesting. Many people won’t even buy car insurance unless compelled to do so. Indeed even if they don’t they are “let off” with a small penalty, maybe a £1000 fine, when the consequences of permanently injuring someone should be permanent financial ruin until death if they cannot pay the actual bill. So even with semi-compulsion they won’t do what should patently be good for them at a smallish price.

    When it comes to household cover, you would be astonished quite how many people take this risk on themselves.

    The problem with encouraging risk transfer for personal long term benefit is that it is the marshmallow paradox combined with a widespread inability for the public to understand and quantify risk all combined with the turbocharged overt comsumption zeitgeist.

Leave a comment