It is over a year since pension freedoms were unleashed, creating unexpected opportunities and challenges for asset managers, insurers, platforms, regulators, advisers and – last but by no means least – consumers.
We have been involved with all of these constituencies as the market has grappled with the implications of this seismic change to the retirement landscape. Frankly, the grappling continues and is likely to be exacerbated by the Lifetime Isa and the potential for a workplace Isa.
The numbers involved in the UK pensions market are huge. Funds invested in private sector defined benefit pensions are over £1trn. Unfunded public sector DB liabilities exceed £1.5trn. Defined contribution pension funds are circa £750bn and growing rapidly. There is a mountain of retirement money approaching – and it is getting larger each year.
Cash makes up over 30 per cent of UK investable wealth, and typical cash balances on platforms and Sipps account for between 20 and 30 per cent of total holdings. This is not surprising in the current environment given very low inflation and flat lining UK equity markets. And the fact is cash is king when it come to mitigating drawdown sequencing risks. Some advisers recommend as much as three years’ income should be held on deposit.
Insurers’ data implies pension savers have been taking out an average of £27m a day since the freedoms came in. HM Revenue & Customs data suggests nearly 200,000 people have withdrawn an average of about £18,000, releasing over £3.5bn in total so far.
Apparently, about 45 per cent is being used for drawdown to provide income and about 44 per cent for lump sums. According to the Association of British Insurers, 52 per cent of customers withdrawing cash from their pensions in the last year did not plan to spend it for at least two years. But in drawing that cash out, many of them will have given up 10 per cent more of the lump sum in tax they would not have incurred had they phased the withdrawals over a longer timeframe.
Would it not make sense to give customers a way of holding and managing that cash within the pensions tax wrapper? Would customers be happy to do that if accessing their pension looked and felt more like accessing their bank account? If they could see, move and spend the available balance via a mobile app? Perhaps even if they could draw money directly from their pension using an ATM or payment card? Would they get better outcomes if they could understand the tax implications, and their options to manage it, for every transaction? If the drawdown rate and the rate of converting investments to cash could be rebalanced against actual performance and consumption? We think the answer to these questions is yes and this could have significant implications for the cost and quality of advised and non-advised drawdown propositions.
So how about retirement bank accounts? This proposition might be developed in isolation by a bank but it is more likely it will be the product of a partnership between a bank and an intermediary platform focusing on the underlying investments. Whatever approach is adopted, creating it will be complex and expensive. But the proposition seems likely to emerge nonetheless.
First, the current processes for providing income and cash to clients taking advantage of pension freedoms are an immediate reaction to the dramatic and unexpected transformation of UK pensions regulation. It is a credit to all concerned solutions have been found that are pretty much fit for purpose. But the obvious next step is to win share by building something that creates a significant competitive advantage for players in this space.
Second, a properly constructed retirement bank account will enable clients to go online and understand the implications of taking an income withdrawal before pressing the button. Understanding the tax payable and whether they are taking too much relative to the plan they have agreed with their adviser may give then pause for thought.
Third, the overall client experience will be transformed. More control, information and education. Frictionless processes that are intuitive, easy to use and available 24/7. And, of course, consolidation of all their investments in one convenient place.
Consolidation has another dimension that suggests why retirement bank accounts may become important: the proposed Lifetime Isa. If it develops as planned it should look very attractive to savers looking to fund the deposit for a house and receive a 25 per cent bonus on contributions. For the wealthier it could be an effective pension savings vehicle if they are up against lifetime limits. Many believe the workplace Isa is an obvious next step. If so, it surely makes sense to consolidate these funds on the same platform as the pension fund inside a retirement bank account.
Of course, advisers are already delivering aspects of this kind of service and their propositions will become increasingly sophisticated over time. But the concept of an actual retirement bank account is a considerable step further and will probably be driven by platforms, providers, the banks themselves or even completely new entrants spotting the opportunities in this massive market.
Malcolm Kerr is senior adviser at EY