Despite the financial crisis and its impact on the financial services sector, at-retirement sales to insurers have exceeded £40bn over the last three years.
Driven by the requirement that consumers have to do something with their pension savings pots, this is a market where it is not a case of if consumers buy but what, when and for how long they buy. It is in this regard that advisers and product providers have a major opportunity the former to steer consumers through an increasingly complex set of choices, the latter to provide financial solutions that align better with the potentially variable and diverse needs in retirement.
In 2010, the at-retirement market was worth over £14bn in premiums, with almost half a million products sold. Lifetime annuities dominated, representing over 85 per cent of total policy sales and worth £11bn in premiums, according to Association of British Insurers data. Average pension pots to purchase annuities were £26,000 although some 60 per cent of the total was for less than £20,000.
The most popular ages for purchase continue to be 60 and 65, with 17 per cent and 19 per cent of annuities sold to these age groups respectively. A further 23 per cent annuitise at ages 61 to 64. A surprisingly big number of sales were made prior to age 60, at 31 per cent, with just 4 per cent to people aged 70 or over.
Breaking the lifetime annuities figures down further, conventional products dominated, representing over 80 per cent of policy sales and worth £8bn. Enhanced annuities, where terms better than standard are provided because a person’s medical condition or lifestyle indicates a lower than average expectation of life, have grown significantly in recent years.
In 2010, these sales reached £2.4bn, with over 50,000 people benefiting from enhanced terms.
Meanwhile, although profits annuities and unit-linked annuities are quite separate propositions, they together represented sales of £600m to around 16,000 people pre-recession. This level of sales has changed little in recent years.
Income drawdown, which is typically more suited to those with bigger pension pots and who are happy to accept more risk, attracted close to 30,000 sales worth £2.2bn in 2010.
And finally, there is the range of products that lie somewhere in between lifetime annuities and at the other extreme, income drawdown. These collectively represent sales of around £1bn.
The final removal of the default retirement age at the beginning of October heralded a further landmark in the shifting sands of pensions legislation. This followed 2011’s Finance Act which, among other things, removed the need for compulsory annuitisation. It also introduced new income drawdown and flexible drawdown rules.
These changes in themselves are unlikely to cause a seismic shift in consumer purchasing behaviour of retirement products in the short term. However, at some point in the not-too-distant future, it is plausible that increasing numbers of people will understand that working either full or part-time into their late sixties or even early seventies may be the only way to maintain a decent standard of living in their old age.
Advisers and product providers need to be alert to the changing consumer demands this would necessitate.
With the employer’s role in influencing a person’s retirement plans diminished, there is a cast-iron opportunity for advisers to step in and facilitate a robust consideration of all relevant issues to get the timing and basis of retirement right. Furthermore, the growing complexity of the retirement decision and the products available to support it suggests this is a prima facie case where financial advice should become a must-have and not a luxury for significant numbers of people.
Through a combination of sophisticated analysis tools and supporting materials that communicate the value of the service provided, there is much potential to establish a long-term and fruitful relationship that fits in a post-RDR world focused on fees for services provided. The value of periodic reviews to adjust assets to changing income requirements that advisers can provide also augments their at-retirement proposition.
For product providers, acceptance that a portfolio approach to selecting retirement products will be an important driver of future strategy. There will continue to be consumers whose pension savings are relatively limited and where the only option is to secure an income at an appropriate point. For others, a portfolio approach rather than a one-off purchase would be better aligned with meeting retirement needs.
Such an approach requires an evolving mix of short, medium and longer-term products. While there is a range of products currently available, further innovation is arguably needed. Product providers will need to determine whether they are best placed to focus on individual products, provide a limited range or supply the full spectrum of solutions.
Helping consumers through the growing challenges presented by retirement is an essential opportunity that our industry must rise to.