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Why retirement income approaches need to change

Emma Byron, L&G

In 50 years’ time there is set to be an additional 8.6 million people aged 65 and over in the UK alone. In just a few decades, therefore, there could be as many as 20 million different retirement plans for 20 million over 65s.

We are in the midst of a huge demographic shift, and that means the need for a significant change in our approach to later life planning and retirement income.

With a widening pool of older people comes a much broader range of circumstances, requirements and preferences for later life working and income.

The “one size fits all” approach of an annuity or drawdown is yesterday’s solution to yesterday’s problem. A new age of retirement that includes work, relationships, ambition, contribution and disruption needs financial products and advice to match.

Power to the people

The pensions reforms of April 2015 were certainly a step in the right direction, marking one of the greatest changes to the pensions landscape in recent history. Giving people control of their pension savings, it was a vote of confidence in people’s ability to take charge of their future.

For the first time, however, individuals have had to consider issues as varied as later life care, longevity, tax, investment performance and charges when planning their retirement incomes.

The then pensions minister, Steve Webb, famously claimed that if people wanted to spend their savings on a Lamborghini then so be it. And whilst there hasn’t been a sudden increase in the number of over-65s driving sports cars, not everyone approaching retirement has managed to make the most of their savings.

With a huge range of choices and considerable complexity when it comes to accessing and investing their pension pots, many savers have taken the path of least resistance and not necessarily the one best suited to their retirement needs.

Since the introduction of pension freedoms, 1.5 million defined contribution pension pots have been accessed, and twice as many have been used for drawdown as for an annuity, with no guaranteed income despite people living longer and the UK state pension among the lowest in Europe.

More worryingly, a third of these DC pots were accessed without advice, up from just 5 per cent before the 2015 reforms.

That might not be a problem if people were using their extra time in retirement to research their options, and the move to drawdown was carefully considered. Worringly, however, research has found that people are disengaged when it comes to their pensions, with most spending more time deliberating when buying a car or a bathroom than deciding on how best to use their pension pot.

Understanding retirement choices

As an industry, if we are to help these individuals shape their retirement effectively and get the most out of their retirement income, we need to establish the impact that financial choices can have on people’s retirement journey. Our recent research with think tank Demos has made some strides towards this considering the emotional impact of retirement decision-making on customers’ lives, and looking at whether the choices customers make at retirement have a lasting impact on their wellbeing.

For the study, Demos analysed a dataset from the English Longitudinal Survey of Ageing. The most recent wave for which the complete pension and wellbeing data is available was collected in 2014/15, prior to the introduction of the 2015 reform of pensions, however, it does raise issues that warrant further investigation.

It found that of the poorest 50 per cent of Britons in retirement, nearly one in five who had put their money into drawdown said they had not enjoyed their life in the past week, compared to just 8 per cent of those with annuities. This, and similar questions in the survey, are often used as indicators of depression.

Pension freedoms have ultimately given people more choice to use their lifetime savings, but with consumers potentially making decisions based on convenience rather than an analysis of the appropriate information, thousands of UK retirees could be facing dissatisfaction or even depression in retirement.

In the three years since the changes, more than half a million individuals have taken drawdown, meaning there are potentially as many as 50,000 people in the lower income bracket who have opted for drawdown who may now be finding life more difficult as a result.

Unique solutions

No two retirements are the same. Everyone deserves a tailored solution that blends a number of options to best meet their needs throughout later life. And it certainly shouldn’t be the case that people are forced into taking an annuity or to drawdown.

Today’s retirees face much tougher decisions and greater uncertainty about how to make sure their savings will last. But at the moment, most don’t have the knowledge and information to make the right choices.

According to the FCA, only six in ten knew that a single life annuity would give them a guaranteed income for the rest of their life, for example. Many others are not even aware of what product they have, the costs involved and how their money is being used.

As an industry we have a duty of care to support people to ensure they get what they want out of the retirement they’ve worked long and hard to save for. We need to do more to engage consumers and guide them to better decisions.

It is not just about maximising clients’ money, though. It’s also important to take into account the changes that might happen over the course of retirement. Not everyone will want to continue having to manage funds in later life, and their needs and appetite for risk at the beginning of their retirement will differ greatly to their later years, when they may look to the benefits of guaranteed income for life.

All this needs to be considered in any successful retirement plan and that’s why the role of advisers in later life planning is more important than ever.

Emma Byron is managing director for retail retirement income at Legal & General


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  1. IMHO, the pensions reforms of April 2015 were a disastrously ill-considered step in the WRONG direction, not least because the vast majority of ordinary people have no idea AT ALL of the complexities or dangers involved in “taking control” of their pension savings. It’s the financial equivalent of allowing people to undertake their own MoT test every year and then self-certify that everything is in order. What responsible government would ever allow THAT?

    Most people have no idea of how a registered pension scheme works, even when it’s explained to them by professional adviser and even though the fundamental mechanics are, in essence, pretty straightforward. Things only start to get really complicated for high earners and/or for those who’ve already built up substantial benefits approaching, in aggregate, the cursed LTA.

    Sure, an assortment of different plans such as an old S226 Retirement Annuity, a S32 Buy Out, a PP (perhaps including GARs) and some preserved benefits in a former employer-sponsored scheme can be bewilderingly complicated and an explanation of the differences between each of them is likely not only to incur unwelcome costs but also to test to the limit their powers of understanding. BUT, in essence, what it all boils down to is a few fundamental questions: How much retirement income do you anticipate needing? (Most people have never been asked that question). How far short of that objective are your present arrangements likely to fall? (Most people haven’t the faintest idea). And: What needs to be done to bridge the gap? (which is where the services of a financial planner should come into play). (Nearly) everything else is techno-detail. A good financial adviser will (seek to) separate the fundamentals from the techno-detail.

    As a vote of confidence in people’s ability to take charge of their future, George Osborne’s Pension Freedoms (for all too many people, freedom to make the wrong choices) were wholly misplaced.

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