The UK at-retirement market is in the midst of massive change. This is news to no one. But it is not just the pension freedoms that are changing our market. The retirement market sits at the epicentre of a perfect storm of change driven by regulators, technological shifts, competitor dynamics and changing consumer preference.
Financial advisers stand poised to gain considerably. The new pension flexibilities introduce a great deal of complexity to an already difficult decision: how and when to retire.
In this article I will draw on learnings from the US retirement market to help predict and understand how our market might evolve.
Over the past four decades 401(k) and IRA (broadly the equivalent of defined contribution and Sipp) have become a more important source of US retirement savings. We have begun to see the shift in the UK away from defined benefits and expect it to accelerate in the coming decade.
The reason for the shift in the UK is not just the new pension flexibilities. The growth of assets in DC plans is also a result of changing demographics, as more Brits enter the decade pre-retirement and ramp up retirement savings.
The focus in the US to date has been on wealth accumulation for retirement rather than income drawdown but nonetheless there are four decades of investor behaviour to draw on and the regulators, industry bodies and providers are increasingly focused on income.
According to a survey of the American Association of Retired Persons in 2012, social security continues to form the bedrock of retirement income. Eighty per cent of Americans over age 65 receive income from social security and these payments have provided more than a third of income for retires in the past two decades.
Just under one in five (19 per cent) Americans receive income from pension and retirement savings (including workplace and personal pensions). As you might expect, when we look at stratification by income bands, the wealthy receive a higher share of their income from retirement and pension savings.
Interestingly, the wealthiest are also most likely to work beyond age 65. The AARP study found that 46 per cent of retirement income for those aged 65-plus comes from earnings, either from part time or full time work.
In terms of demand for advice, statistics published by Employee Benefits Research Institute suggest that one quarter of retirees have obtained investment advice from a professional adviser who was paid through fees or commissions (note: there has not been a commission ban in the US – yet). It is the wealthiest individuals that feel the greatest need for investment advice. In the US the primary driver for financial advice appears to be tax protection. The country’s tax system is incredibly complicated. For example, depending on the state in which you reside when you retire, you may pay vastly different levels in income tax.
Anecdotal evidence suggests advisers view the moment when investors roll over a DC plan to an IRA as an important opportunity to offer a more robust financial plan. The same is true here: the trick is not just offering the point in time advice but in attracting a customer for the long term.
The big product innovation in the US for the at-retirement market has been deferred annuities. These products have yet to get much traction and there are several barriers. The most difficult to surmount is consumer education: consumers underestimate the risk they will outlive their savings. The other big innovation has been technological in the form of planning tools and robo-advisers.
We expect to see increased demand for financial advice. The challenge for advisers will be to adapt business models to make use of technology to meet the needs for on-demand advice from the mass affluent.
Heather Hopkins is research director at Platforum