The Budget has changed everything in the financial services industry and thrown down a challenge to everyone in the market to respond to.
What is clear is that the UK has a real opportunity to create a world-leading retirement and pensions system over the next few years.
It is a really exciting outlook for financial services which should help deliver a more prosperous retirement for millions of people.
It is however important to remember that the previous system no longer reflected retirement reality in the UK. Standard annuities simply were not able to meet growing social challenges including increased longevity and persistently low long-term interest rates.
The Budget changes reflect the fundamental shifts in longevity and attitudes to retirement across the UK and build on previous reforms including the new flat rate State Pension from April 2016 and the introduction of workplace pensions auto-enrolment.
the previous system no longer reflected retirement reality in the UKThe role now for the insurance industry is to offer innovative solutions that accommodate the Government’s offer of flexibility and choice and at the same time can offer security against outliving pension savings, persistently low interest rates, and market volatility.
What is clear is that pensions are now even more attractive as an investment vehicle. There may be a need for further legislative and tax changes such as harmonising tax relief at 30 per cent to ensure pensions are better understood and fairer for all and removing the lifetime allowance would reduce complexity.
The impact of innovation will be felt most in the annuity market – Association of British Insurers’ data shows annuity sales were in decline before the Budget having fallen 16 per cent in 2013 to 353,000 individual sales worth around £11.9bn.
The current annuity market will change massively but the good things about annuities including guaranteed income for life with no investment risk should be retained. Innovation needs to recognise the need for an income in retirement and the need for growth with protection.
There is a massive market for innovation to aim at and it will be a growing market. Currently around 33 per cent of single life annuities and 45 per cent of joint life annuities are bought for premium sizes of more than £30,000. They could all benefit from new solutions as could the 21,000-plus new drawdown customers a year looking for certainty on income and capital.
The new retirement reality is that the need for income is no longer a simple matter of signing up for a product paying a set amount for life. People’s retirements are now more U-shaped or J-shaped with a need for income at the start which then drops before rising again later in life when people need care.
Financial advisers tell us that guarantees on income and capital will be more important. They believe that the new pension regime is likely to increase the use of guaranteed products, that are more flexible than the complete inflexibility of annuities, but less risky than income drawdown. In the new environment for UK pensioners, there is therefore likely to be an increased role for guarantees. Pensioners will welcome certainty about their future income, or being able to rely on a minimum amount. The market for unit-linked guarantees is currently worth between £1.2bn and £1.5bn but could easily increase to £4bn by the end of 2015.
Other innovations which would be welcomed could include low-cost drawdown products and high income funds specifically set up for retirement. If people are working part-time in the run-up to retirement then they could replace employment income at the start with funds designed for that purpose.
However all the innovation in the world will not tackle the central issue – people are going to need expert advice on their options. Guidance and advice will play an absolutely central role in ensuring that people understand the risks of market volatility, longevity risks and the costs of outliving their savings no matter what the products on offer are.
Access to impartial, fair and transparent financial guidance at first, and financial advice afterwards, is essential to fostering innovation in the retirement income market.
Dominic Grinstead is managing director of MetLife UK