From Special Report: At Retirement - May 2012
MGM Advantage sees market changes creating opportunities
ADVERTORIAL: Aston Goodey talks about how the retirement income industry has changed and how advisers should be considering all the options available.
Commentators have long anticipated changes to the retirement market, with the effect of the so-called “baby boomer” generation reaching retirement age having a profound effect on both the volume of sales and the types of products being offered by providers. And now, research by MGM Advantage has confirmed that, not only has the market changed substantially in recent years, but it also looks set to change further in the future, generating both opportunities and responsibilities for the industry as a whole.
“Our analysis shows that the market is getting bigger and looks set to peak, with an average of 2208 people turning 65 each day this year,” explains sales and marketing director Aston Goodey. “While in 2004, the advised market had sales totalling £9bn, in 2011 that figure was closer to £12.5bn and will obviously be higher this year.
“For those reaching retirement who are lucky enough to have an adviser, the shape of the market has changed considerably. In 2004, 62.5 per cent opted for a conventional annuity, while 10.2 per cent were recommended to go for an enhanced annuity and the remainder went into income drawdown. Last year, it was more evenly split, with 41 per cent in conventional annuities, 42 per cent in enhanced and the rest in drawdown.”
Indeed, MGM Advantage anticipates the enhanced market will gather even more pace, with 60-70 per cent of the market going into those kinds of products. It believes part of that shift is down to the increase in the number of players in that area of the market and the way in which they have been promoting those products, as well as an improvement in the infrastructure for getting quotes, which MGM Advantage intends to improve in its own proposition this year, offering an online facility to get a variety of provider quotes from just one form.
“I think fairly soon, as more and more people go for enhanced annuities, there will be a shift to it all being seen as one annuity, without the differentiation between conventional and enhanced. The conditions of normal form filling will be able to assess things like smoking and health issues before an annuity rate is given,” Mr Goodey states.
However, an area Mr Goodey remains concerned with is the low number of people who do not have the benefits of professional financial advice taking up an enhanced annuity. In fact, only 2 per cent of people without an adviser get an enhanced annuity.
“That figure clearly shows the value having an adviser has,” he says. “The problem is a lot of people, especially those with smaller retirement pots, do not have access to that type of advice. We, as an industry, need to look at trying to get down below the adviser level to make sure people know about enhanced annuities. There are lots of opportunities in that area.”
Another trend MGM Advantage has identified is the fall in the number of individuals taking up income drawdown, which has long been the second biggest market area outside conventional annuities. In 2004, 22.6 per cent of total sales in the advised market were dedicated to income drawdown products, while in 2011 that figure had more or less halved to 10.7 per cent. For Mr Goodey this trend is unsurprising as he believes income drawdown is suffering from the effects of a “perfect storm”.
“Over the past five years the market has been torrid and gilt yields are very low and that has impacted upon performance,” he says. “Add to that the changes in legislation that mean the maximum income that can be taken has been reduced from 120 per cent to 100 per cent and it is understandable that people feel that everything is conspiring against them.”
He suggests one solution for those that have become disenchanted with income drawdown, which is opting for an investment-backed annuity. Clients can then remain invested and, hopefully, make back their money if the markets go up over time, while maintaining the equivalent of the 120 per cent income facility. They also benefit from mortality cross subsidy, which means that the longer they live, the more they earn from their annuity as they benefit from those who do not live as long. In practice, this means an annual bonus, which becomes larger each year as the client gets older.
“The impact of mortality cross subsidy should not be underestimated,” says Mr Goodey. “If you take the example of a 70 year old male with an initial fund of £100k, if he remained in the product for five years – in identical funds and with identical costs to being in drawdown – he would earn £7,600 more than in drawdown. Over the following five years from age 76 to 80, he would earn £13,800 more than in drawdown, while from age 81 to 85 it would be £21,600. For the next five years to age to the amount would be £33,400. Over the whole 20 years that totals £75,900 extra simply down to mortality cross subsidy.”
In another example, Mr Goodey illustrates how a 65 year old male with an initial fund of 100k and who takes the maximum drawdown of 100 per cent for 20 years will be left with £46,600 at the age of 85. Meanwhile, in the equivalent flexible annuity, to be left with the same amount after 20 years the client would need to withdraw 121 per cent income. This too is because of the benefits of mortality cross subsidy.
“We are really keen to beat the drum on this issue,” he says. “Some advisers and their clients just are not familiar with this benefit or with the sorts of solutions that are available. At the moment flexible annuities are a relatively small part of the market, but if more people knew about them that number would grow.”
Mr Goodey is also urging advisers to be aware of the effects of the European Court of Justice ruling that means providers will no longer be able to differentiate between males and females, but will instead have to provide a unisex rate for both. This is likely to mean a fall in rates for men, who would be well advised to annuitize before the deadline on 21 December 2012, while for women the rate is likely to increase and they would be better off waiting until after that date. In addition, Solvency II, which comes in on 1st January 2014 could also lead to rates falling which, again, should perhaps encourage people to annuitize sooner rather than later.
In short, Mr Goodey is keen that advisers are aware of all the options available for their clients, as well as the changes that are likely to happen to the industry as a whole over the coming months and years.
“People are still losing out by simply looking for the best rate on the market and ending up with a level annuity, which will be destroyed by inflation over time,” he says. “People generally hugely underestimate how long they are going to live for and could well be opting for an annuity that, in effect, will not offer them a pay rise for the next 20 plus years.
“The great thing is the market has come on leaps and bounds and there are now a range of options, including variable annuities, with-profits annuities, investment-backed annuities, as well as fixed term annuities and drawdown products. Clients now just need to know about them and perhaps to realise that, for most people, the solution will not be one thing that will last throughout retirement, but is more likely to be a range of different solutions over time.”
Aston Goodey is sales and marketing director at MGM Advantage