I spoke with a number of members a year ago about how they were handling the decumulation challenge facing their clients. What shone through was how difficult delivering advice in this area is, how complex the subject matter, how ever-shifting the political and regulatory backdrop and how the marketing of products only adds to the confusion.
Clarity was needed and so we set about understanding the issues and we were joined in our work by Prudential UK. Advice at retirement used to be pretty cut and dried. This simple state of affairs is an increasingly rare occurrence and the services of IFAs are increasingly being sought.
It was therefore not surprising that it was IFAs who led the call for light to be shone on the decumulation landscape. To paraphrase a Chinese proverb, we considered it “far better to light a candle than complain about the darkness” and our Financial Planning Through Retirement study and good practice notes for firms sought to provide the illumination required. The background to our study is concerning. Thirty per cent of the UK population is without pension provision and the welfare state can no longer pick up the slack. We are living longer and must do more to provide for our-selves in retirement.
However, the widely held assumption that the man on the Clapham omnibus is interested enough in financial services to appraise his options logically is woefully misplaced. Recent recoveries belie the fact that significant reductions in the value of the stockmarket knocked the confidence of pension savers who saw their pots shrink at the same time as annuity rates plummeted. Not surprisingly, calls for guaranteed and less risky products were heard.
However, to many, when thinking of the need for financial planning in retirement, you immediately think of “pensions”. While they remain a cornerstone of the decumulation market, they are just one component of an individual’s overall wealth that needs to be taken into account when converting assets into income. Our research showed that cash Isas, savings accounts and property sit alongside pensions as assets used to gen-erate income.
Changing dynamics have rendered the modern retiree’s situation complex. Multiple jobs and therefore multiple pension pots are becoming the norm, retirement is increasingly phased or postponed, the impact of societal changes (divorce, changing family structures, etc) and increased longevity with curtailed state support all mean people need holistic, not just pension, advice to enjoy rather than endure retirement.
While scheme pensions are still available to the few, the annuity market has seen much innovation in recent years. Strenuous efforts have been made by the industry to ensure that consumers exercise the open market option at retirement.
The annuity products being recommended to meet consumers’ needs must be understood in terms of risk transfer and they generally fall into one of three bands:
- Products that transfer investment and longevity risk to the provider such as conventional annuities and third-way products.
- Products that transfer the longevity risk but leave investment risk with the investor such as investment-linked annuities and other third-way products such as temporary annuities.
- Products that leave all risk with the investor such as income drawdown (unsecured pension or alternatively secured pension).
Equity-release products are gaining ground as a decumulation option and have an integral role to play for advisers wanting to offer a truly holistic proposition. However, the “relevant” market is now much wider than just pensions and equity release and includes non-pension savings such as Isas, cash deposits, unit trusts and Oeics and investment bonds.
Holistic advice also requires advisers to be aware of the interplay between state benefits and an individual’s assets. When advising clients at or in retirement, account must be taken of IHT planning, long-term care, the circumstances and income tax positions of the client’s spouse or civil partner, whether there are other dependents and, if so, what are their circumstances?
To advise holistically then, a picture of the client’s overall wealth and the decumulation market is needed. We believe that, with the assistance of Prudential, we have provided advisers with the vital “candle” they need to see these pictures clearly.