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The Retirement (R)evolution

Phil-Wickenden-MM-Peach-700.png

What do the following and, if they have their way, many specialist annuity providers, have in common ?

Lego, Apple, Marvel, Harold Bishop from Neighbours and Jesus? They all have the happy knack of coming back from the dead.

Now it might be a tad early for such a grave prognosis of “commercial death” for annuity providers but that hasn’t stopped many commentators.

There’s no denying the short term impact of the pensions budget bombshell was immediate, significant and that initial sentiment has translated directly into concerning new business figures as well as share price decimation. But then again, with such a major change on the horizon, it is hardly surprising that many will have chosen to defer the decision to commit to an annuity – even one of the new -fangled one year fixed term annuities. Being intellectually justified in “waiting and seeing” will be a very appealing state of affairs for many.

There is no greater truth in business than the tenet that nothing is permanent. Companies must evolve in order to remain relevant and profitable. Some, more than others, need a stronger reminder of this, flirting with death before getting their wake-up call.

The retirement market has needed a radical overhaul for some time, it’s just no-one expected it to be so utterly inorganic and profoundly non-negotiable.

So where are we now?

Our extensive interviews with advisers show that it’s not as cut and dried as some make out. Asked how the Budget announcements will affect how they will be advising their clients who are close to retirement or already retired, 19 per cent of advisers (the most common unprompted response) claimed that changes announced in the budget will not have any impact.

Though these are gut responses and given very soon after the changes were announced, it is clear that opinion is divided:

Retirement (R)evolution-8May14

While a not insignificant number expect to see a move away from annuities (especially of the conventional kind) towards greater cash withdrawals and drawdown, it is interesting to note the number who paint a less certain (and certainly less apocalyptic!) picture. Just under half of advisers (without prompting) responded that either:

a)     There will simply be a greater need for advice or guidance

b)     They are uncertain how things will pan out beyond there being a great deal more choice(which is universally seen as a good thing)

c)     Or they will be advising clients to defer decisions until April 2015.

An acceleration of what was already evolving:

Within the last twenty years defined benefit pension schemes have declined significantly, with only 13% of final-salary schemes open to new joiners and very few FTSE 100 companies offering schemes to new members. This means a new generation of savers have to adapt to an uncertain retirement in terms of income also life expectancy. Mixed in with increased life expectancy, lower gilt yields mean annuity returns have reduced significantly over the past decade. That was already happening. A growing number of advisers increasingly swear by a blended / multiple solution retirement strategy, with many conceding that reliance on single stand-alone solutions is already a thing of the past for most (core) clients. Especially for those using platforms, the build of a “retirement fund” from different product wrappers is a reality.

Q. Do you expect the proportion of your vested / partially vested pension clients using multiple or blended product solutions to change over the next three years?

Retirement (R)evolution-8May14

This is why that which appears revolutionary is rather more of an evolution (Albeit accelerated by the budget announcements).

 

But that’s not to dilute the change that is undeniably happening:

Exploring the likely consideration of the various solutions available, the level of change we can expect (at least in the short term) becomes more pronounced.  This is born out when we asked advisers what proportion of clients who will be considering drawing benefits for the first time before April 2015 will take various following options vs. the options they would have selected had the budget announcements not been made:

Retirement (R)evolution-8May14

Advisers think annuities (of all types – though less so for enhanced) will be the biggest casualties, with (pre April 2015) a 40 per cent reduction in the proportion of clients considering any type of annuity – numbers that chime with some of the  reported on figures  we are seeing (see Standard Life) . Put starkly, annuities accounted for 60.8 per cent of retirement solutions in a pre-budget world and only a projected 36.6 per cent post budget -though it’s also important to note that 20 per cent advisers are undecided. Annuities from “small pots” look set to be the real casualties.

Product Change %pts.

Capped Drawdown

3.1

Flexible Drawdown

-0.1

Fixed Term Annuity (to buy time)

-10.4

Enhanced Annuity

-4.8

Other Annuity (specify)

-9

No Decision

20.2

Looking ahead:

For those considering drawdown for the first time after 5th April 2015 when drawdown becomes completely unconstrained, advisers expect a heavy skew to drawing down in instalments (56 per cent of clients) though just under a quarter of clients are expected to draw down the entire fund in one lump sum with only 17 per cent expected to annuitise… based on the solutions that are available now.

And therein lies the challenge.

An annuity, or something like it, still has an essential place in pension planning. One of greatest fears in retirement is uncertainty. Annuities, although appearing to offer poor value for money, do offer security whereas drawdown requires careful management to ensure the same level of security; ultimately this will depend on the individual and not just pot size (as some have rather statically suggested).  One of the biggest challenges for annuities will be where the amount of income provided , albeit guaranteed , has little meaning i.e. is pretty small.

Innovation now

You only have to consider the degree to which health, lifestyle and financial circumstances can vary to realise how personalised retirement planning should be.  However, until the Budget there was little you could do to tailor your retirement income to your needs, unless you had a significant pension pot and/or other assets, which allowed you to be flexible with your pension arrangements by juggling with different sources of income.

The sector doesn’t have a great track record of innovating in a way that truly connects with the market – see so-(and interchangeably) called third way / hybrid solutions that still raise a high degree of scepticism among advisers let alone consumers. But it’s innovation that is needed if annuity providers want to stick around. Even early signs are that we are likely to see that innovation, both in the products and solutions that will be made available and in the guidance that individuals will be able to access to inform their choices.

The full research report is available from So Here’s the Plan.

Phil Wickenden is founder of So Here’s The Plan – phil@soherestheplan.com

John Moret blog

Expert view (just small circle pic of John):  I think we will see fundamental change in the whole approach to saving through retirement as a result of the government proposals. The full impact will only emerge over possibly 3-5 years but my initial assessment is to quote that old maxim “the only limits are those of vision”. There really is huge opportunity for creative thinking and for embracing technology in a way that this marketplace has never seen in the past”. John Moret is principal at MoretoSipps

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