There has been a sea-change in retirement planning in the UK. Pension investors can now choose the best product for them and select when and how much income they receive. They can also specify how their pension assets are invested well into retirement.
But with great power comes great responsibility and, quite understandably, the chance to manage one’s own pension will not be for everyone. With this in mind, what other options are available?
Default funds have long played a vital role for investors who prefer a ready-made solution rather than creating their own strategy. They have traditionally taken a lifestyling approach, focusing on growth during the accumulation period. The overall risk profile of the fund is then gradually reduced in the approach to retirement to limit the prospect of a large decrease in value close to taking benefits.
When most investors were expected to buy an annuity at retirement this approach was appropriate. Lifestyling default funds were able to deliver a stable value that mirrored the profile of the product providing the retirement income. Indeed, for those with very small pension pots, this strategy may remain sensible.
Looking forward, however, the consensus is that the majority of investors will not buy an annuity or will at least wait until later in retirement.
With this in mind, providers are now exploring solutions that will allow consumers to adapt their investment mix in the run-up to retirement depending on whether their plan is to take cash, buy an annuity or use drawdown.
Additionally, simple drawdown solutions are being developed that let investors select a balance between growth, income and capital protection, allowing that balance to be adjusted over time as their situation evolves. Nest, for example, is currently reviewing the lifestyling approach incorporated into its funds and is considering a mass-market drawdown solution.
But in this new flexible world, it has to be accepted there is only so much a default fund can achieve. Retirement planning is complex and requires commitment and understanding. Although default solutions are going to evolve, many investors will seek out professional assistance.
A new advice market
For advisers, the opportunity to guide investors before, during and into retirement is compelling. By offering to work with them a number of years before retirement, advisers can help to construct a strategy that reflects the individual’s intended retirement journey, the way they wish to take benefits and their appetite for investment risk versus income guarantees.
Once a client is ready to start taking benefits, advisers can guide on which investments to liquidate, which to use to provide a regular income and how to do all of this as tax efficiently as possible.
They can incorporate newer funds that allow investors to move from accumulation to drawdown with the minimum of friction or blend solutions to offer both security and growth. While annuities have fallen from favour, solutions that allow investors to blend guaranteed and non-guaranteed income should court plenty of interest.
Expert advice will also be required where investors are looking to pass on pension assets to their beneficiaries. Advisers can add value both in terms of suggesting investment strategies that help protect capital values and by ensuring the benefits are passed on correctly and tax efficiently. Ultimately, advisers have an opportunity to help coordinate wealth management across the generations.
Default funds will continue to have a place in this new world but it will be fascinating to see what solutions emerge to accommodate those who choose to take control of their pension planning versus those who want to outsource the challenge.
Expert advice and regular reviews will continue to be critical in achieving good outcomes for the majority of investors. A whole new market in long-term financial planning is ready to evolve. We have no doubt that the adviser community is ready to step up to serve it.
Paul Evans is pension technical manager at Cofunds