As well as making pensions exciting, April’s reforms are poised to create a more competitive market. Removing the requirement for those with defined contribution schemes to buy an annuity at age 75, while relaxing the rules on drawdown and death benefits, opens up a range of options for people who would previously have defaulted into an annuity – most likely with their existing providers.
Under the new regime, all providers, whether they are insurance companies or Sipp providers, will be competing for the same business alongside investment managers who will find new opportunities in this market.
Prudential Assurance senior business development manager (pensions) Stan Russell believes we are likely to see costs driven down as more players come into the retriement space.
”Advisers tell me if we could come up with guaranteed income, we would clean up in the market. I get that, but I warn them that guarantees are expensive things to provide. Companies have come into this market place and pulled out as the costs are high. We have guaranteed income products in terms of annuities but the cost of assets has driven down rates.”
Sipp providers and investment managers will be keen to capitalise on a bigger potential market that will result from more people considering their options and going for drawdown, so differentiation from the “provider over the road” will be important.
Meanwhile, insurance companies that have relied on annuitising a “captive market” of existing customers will be forced to innovate to attract customers and find ways to ensure existing customers do not head for the nearest exit.
This all sounds positive for consumers, with advisers and their clients being able to choose the best option to suit the circumstances of the individual, which can also include withdrawing the entire pension pot as cash at age 55. Healthy competition is surely a good thing for the consumer, rather than a market where most people are propelled towards a narrow path without considering whether there is a better option.
Broadstone executive and retirement services director Matthew Brown expects to see a lot of income product launches and innovation in the annuity market, with annuities being developed that start off providing a high level of income which then decreases to allow the state pension to kick in.
“We could also see it tilt towards long-term care needs. The annuity market could be reinventing itself as an insurance product against running out of money in retirement. But I don’t see innovation in the drawdown market because I’m not sure what it could do. I think it will become a homogenous product,” he says.
Brown also expects to see a wide and varied range of fund managers in the market and, with platform providers also entering the fray, he expects costs to come down – particularly as increasing reliance on technology is also driving them down.
MGM Advantage pensions technical director Andrew Tully believes we will not see much difference in pension products immediately come April. MGM Advantage is currently working on a product for the new pensions environment called Retirement Account and Tully says it is easier for smaller firms to innovate. He says it could take up to two years for many providers to launch new products into the market.
Liberty Sipp managing director John Fox says: “The Budget changes are fantastic for consumers. There will be a plethora of new products launched as alternatives to annuities. There will be one big pension market now everyone is in a position to chase the same customer, and drawdown will be the product of choice.”
According to Fox, post-April pensions will be a lifestyle product that people can plan to use however they need once they reach age 55.
“The Budget put pensions at the heart of financial planning. Age 55 will be a staging post in the future as people might use their pension to pay off student debt or repay their mortgage,” he says.
But many in the industry are concerned about the way in which the increased range of options will be communicated to consumers against the backdrop of what constitutes guidance and when it tips over into the remit of regulated advice. Guidance in terms of telling people what is available differs from highlighting the best option for them, which is personalised and falls into the area of regulated advice. In practice, however, the line is not so clear cut and the big worry is that people will not get access to the advice they need.
Brown says: “I don’t think there is going to be a consumer bonanza in terms of access to advice. The Government guidance guarantee will shy away from products and so it should. It will be conceptual. Whether people will have access to regulated financial advice in exploiting the options is unknown.”
Brown points out that financial advisers largely focus on clients at the high net worth end, so it is unclear how the mass market will be served given the banks have pulled out of advice.
Consultancy firm Jaywing chief executive officer Martin Boddy says: “The reforms mean people can get a better deal, as long as they have the right guidance and advice. Therein lies the issue for me. People who have got significant pension pots will get advice: the IFA community is there to support them. Those who have money will access advice but what about everyone else?
“Most pension pots are modest, so fees for engaging with an IFA won’t be supported. But at the moment its unclear whether there is a role for pension providers and insurance companies to play here in being able to communicate with customers.”
For Boddy, one of the challenges insurance companies face is how to engage customers who cannot afford to pay for professional financial advice by building internet relationships with them. He says previously these relationships were built through intermediaries, so the insurance companies had little direct contact with policyholders. Now they face having to build those relationships themselves, with the problem of trying to communicate with customers while being careful not to offer advice. Meanwhile, the regulated advisers who are qualified to provide advice cannot deal with this part of the market economically.
Russell believes that, as greater flexibility will inevitably mean increased complexity, people will see the dangers in choosing the wrong option and will consult financial advisers. He points out that paying more tax is one of the consequences of making the wrong choice and that the cost of this will far outweigh the cost of paying for advice.
“The new flexibilities are great news for providers and advisers, as long as people understand they bring added complexity that could result in people doing the wrong thing,” he says.
Pension freedoms: The story so far in numbers
People with defined contribution schemes can take their entire pension pot as cash at age 55 from April. Shares in annuities provider Partnership Assurance fell by 55 per cent on Budget Day amid concerns that the reforms signal the end of annuities. Just Retirement shares fall by 42 per cent.
Analysts at Barclays predicted the demise of the individual annuity market within 18 months the day after Chancellor George Osborne’s “political masterstroke”. But pensions minister Steve Webb disagreed, saying the reforms will jolt insurers into creating new products.
LV= and Just Retirement rushed out one-year fixed-term annuities in April, aimed at people retiring now who want to take advantage of the reforms. Opinion within the industry was divided: supporters said these products meet a short-term need, while critics argued they are expensive.
Research from PriceWaterhouseCoopers in April found 63 per cent of respondents to its survey would pay for advice on accessing their pension at retirement, but half of those had pension pots worth £40,000 or less.
In May, the Association of British Insurers estimated the guidance guarantee could cost the industry up to £13m a year to deliver.
Government projections published in August show 130,000 people a year are expected to use the new pension freedoms, resulting in an extra £3.8bn for the Treasury.
In August the Government also announced its intention to lower the annual allowance from £40,000 to £10,000 for people who access their pension pots. This is intended to prevent people “recycling” pension cash and effectively making money from tax relief under the new regime.
In September George Osborne announced the abolition of the 55 per cent tax on death for pensions taken before age 75. But Treasury documents created confusion over whether annuities were included and some annuity provider share prices dropped as a result. December’s Autumn Statement announced there would be no income tax payable on annuity income received by surviving spouses upon death before 75.
Individual annuity sales at Just Retirement fell by 59 per cent in the three months to September compared to the same period last year.
In October pensions actuary Hymans Robertson predicted a 30 per cent take up of transfers from DB to DC schemes on the back of the new pension flexibilities.
Last month the FCA highlighted what it saw as the risk of drawdown for those with pension pots worth less than £50,000. But this contradicted the Treasury’s stance of widening the options for everyone.
Government estimates in December reveal the Treasury is set to lose £50m in 2015/16 and £730m by 2019/20 as result of changes to the pensions death tax.