Advisers waiting for a flood of products to meet the demands of the new pension freedoms have been told to expect “evolution, not revolution”.
Pension freedom day finally arrived this week, giving savers greater control over their pensions than ever before.
Commentators have predicted there will not be a flurry of new products to serve the emerging market but providers have spent the last 12 months tweaking their offerings.
So what products are on the shelf for advisers now clients can do whatever they want with their pots?
Could the reforms see the resurgence of fixed-term annuities as people are put off buying an annuity until later life? Will value protected annuities rise in popularity as pensioners take advantage of changes to pensions death taxes? Or could “third way” blended services emerge as the dominant product?
New world order
Following the introduction of the Government’s pension reforms, savers have five clear options: Buy an annuity, enter a drawdown contract, make withdrawals using the new uncrystallised funds pension lump sums option, use a combination of the above or do nothing.
In the final report of its retirement income market study, published in March, the FCA warned savers face new risks as a result of the development of “complex” and “difficult to compare” products in the wake of the pension freedoms.
Annuity providers have adjusted their existing contracts to keep up with the changes. Most have ext-ended annuity guarantee periods – which have had the 10-year restriction removed by the Government – and promoted the option of value protected annuities.
These allow savers to purchase an annuity that pays a lump sum on death of up to 100 per cent of the value of the original purchase.
MGM Advantage pensions technical director Andrew Tully says: “We’ve fixed one of the main concerns about annuities, meaning customers can now get great value
from their annuity whether they live or die.
“The money-back guarantee is a cost-effective option that everyone should consider and which can be designed to suit the needs of individual customers. This gives families peace of mind that the money invested in providing a secure income won’t be lost and removes the understandable sense of financial injustice that can sometimes be felt when a holder dies early.”
Fixed-term annuities also appear to be making a comeback after Legal & General revealed it is offering customers a “fixed-term retirement plan” which allows advised clients contracts up to 40 years and execution-only customers up to 25 years and pays a lump sum on maturity.
However, MetLife UK wealth management director Simon Massey says his firm – which exited the market in 2012 – is not considering a return.
He says: “When you compare the rates of return you can get on a fixed-term annuity with other available propositions it can often be difficult to justify their use and that’s particularly true in the low interest rate environment we’re in at the moment.”
From this week, all customers entering drawdown will be put in flexi-access drawdown accounts and will no longer be able to use capped contracts. Savers have no limit on the amount that can be withdrawn but will have a restricted annual allowance of £10,000 once the pot is first accessed.
Providers have typically scrapped fees explicitly related to drawdown, instead billing clients through existing platform and annual management charges. However, some providers are imposing early encashment penalties.
For instance, Hargreaves Lansdown will charge customers £295 plus VAT if they empty their drawdown pension within 12 months of setting up an account.
Providers are also grappling with whether or not to allow customers to enter drawdown contracts without an adviser. L&G will not be offering drawdown without advice while Scottish Widows will allow non-advised customers to enter a simplified drawdown proposition as long as they put at least £10,000 into the contract.
The only brand new withdrawal option created by the changes is uncrystallised funds pension lump sums. UFPLS allow savers to take slices of cash from their pot, with 25 per cent of each withdrawal tax-free. Many have viewed the mechanism as a way for providers and pension schemes unable or unwilling to provide flexi-access drawdown to let members get access to their pension.
L&G distribution director David Pope says the firm will restrict UFPLS to two ad-hoc withdrawals in any calendar year, with a £5,000 minimum withdrawal or the whole fund if less. Prudential is allowing unlimited withdrawals from its modern plans but customers must take at least £1,000 in each withdrawal and leave at least £1,000 in the plan.
Standard Life customers will not be limited on the number of ad-hoc withdrawals they take but this will be kept under review as customer behaviour is monitored, says head of pensions strategy Jamie Jenkins.
But he says debates around pension “bank accounts” are misguided.
He says: “People are talking about using your pension as a bank account but why would it not be similar to a salary where you can draw on the funds whenever you want – the easier way to do that is through a bank, not direct from the employer. Why try and recreate the banking system in a pension product?”
Countless surveys since the 2014 Budget have indicated pensioners want a combination of flexibility and guaranteed income.
Some providers say this is best achieved as a blending of annuities and drawdown in a single package.
Prudential head of business development for retirement Vince Smith-Hughes says: “I wouldn’t be surprised to see more packages coming onto the market. My only challenge to that is if you’re looking to buy the equivalent of an annuity and drawdown within one plan, why wouldn’t you go and get the best annuity rate on the open market and then get the most appropriate drawdown for you, with two separate offices? From an advice viewpoint, packages might not be as attractive as they first sound.”
Just Retirement’s response to the changes was to launch a platform allowing customers to siphon off funds to buy a guaranteed income through an annuity, leaving the rest in a “rainy day” pot of low-risk, passive investments.
Director Stephen Lowe says: “At the moment we’re not looking at the high-net-worths who want to put money in high, alpha-chasing, sustainable income – we’re targeting middle Britain offering guaranteed income with a bit on the side.
“Clients’ needs haven’t changed – I don’t think we’re going to see a revolution, this is evolutionary.”
Other providers see unit-linked guarantees – essentially guaranteed drawdown – as a way to serve the mix and match market. These are unit-linked investments with an insurance policy protecting capital, income or both. Axa Life Invest, Aegon and MetLife are currently the only active providers in the UK market.
Axa Life Invest managing director Simon Smallcombe says: “Most of the conventional and enhanced annuity providers have come out with hybrids, others have ann-ounced fixed-term annuities to combat the loss of the asset on death. We were fortunate we redesigned the unit-linked guarantees in May for the UK market. Having a guaranteed drawdown option helps advisers plan for their client’s future without losing any of that flexibility.”
Matthew Harris, director, Dalbeath Financial Planning
Providers are still working out what consumers want and to be honest so are clients. We are not quite there yet in terms of products that offer the best of both worlds: that don’t require you to lock your money up in an annuity but still have some kind of capital protection. At the moment we have not seen any providers nail that.
Georgina Partridge, partner, Plutus Wealth Management
Providers have done their best to prepare for the reforms under tight timescales and there is no situation I can foresee that we won’t be able to deal with post-6 April. It is good to have the flexibility of blended annuity and drawdown products as certain clients will want the security of an income for life.