Plus ça change, plus c’est la même chose – the more things change, the more things stay the same. That phrase could easily be applied to elements of the retirement market.
The retirement income landscape has changed considerably in recent years and today’s retirees have far more choice about how they structure their income in retirement. Yet, despite all the innovations in the market, industry figures indicate that last year 80 per cent of the volume of the retirement income market went into lifetime annuities.
Deciding how to take your income in retirement is one of the biggest decisions that someone will make and, given that many spend decades saving for it, it is important to get it right. In recent year the industry has been firmly in the spotlight as policymakers look at how best to ensure that retirees have access to products that allow them to fund a lengthy retirement during which their needs are likely to change.
When talking about decumulation many people concentrate on the fact that selecting a retirement income product is an irrevocable decision. Indeed just recently Steve Webb called for the industry to introduce switchable annuities, a product that allows retirees to transfer out of if they could achieve a better deal elsewhere much like a mortgage.
These products already exist – they are known as fixed term annuities.
Although these products already exist we do not believe they are a silver bullet. In fact, just a few weeks ago we launched a report into fixed term annuities ‘Fact and Fiction’ which looks at the scenarios when it would be appropriate for a client to consider a fixed term annuity and when it would not.
One of the key factors to consider, amongst others, is a client’s health. For example, a client could potential benefit from purchasing a fixed term annuity if they are in poor health but do not yet qualify for an enhanced annuity. Likewise, if their spouse is in seriously impaired health then, rather than locking into a standard joint life annuity, they may wish to consider purchasing a joint life fixed term annuity instead.
The ability to switch from a fixed term annuity into a more suitable retirement income product means it offers retirees some degree of flexibility. Although, since we launched our report, adviser feedback has made it clear that many did not realise just how flexible these products can be.
Many understood that after the agreed period their client could purchase a new retirement solution. However, very few realised that products that have a conversion feature or a break clause allow clients to convert to a new solution even within the time-frame of the fixed term, if their circumstances change or a change in interest rates or annuity rates means that they could get a better deal.
The advent of this feature not only brings fixed term annuities into line with mortgages as Steve Webb suggested, it also means that an adviser could recommend that their client purchase a fixed-term annuity with a 25 year term safe in the knowledge that if further down the line it was no longer the most suitable solution for their client they could remedy the situation.
This means that clients have the potential to adapt the way they have structured their income, and affords them an element of certainty as the income they receive over the period is guaranteed.
It is human nature to always want more but sometimes we ruin what we have by searching for something we do not need. Whilst there is plenty of room for innovation, rather than focussing solely on inventing new solutions we need to look at how we can make more of those we already have.
Vanessa Owen is head of annuities and equity release at LV=