What the future holds for retirement income

Mr Perks says advisers are likely to see the advent of more fixed term annuity products, variable annuities and partial guarantees, such as unit-linked guarantees.

Pre-Budget, Mr Perks says LV was starting to see advisers looking for blended solutions for their clients - and three quarters of advisers say that clients have started to request products that offer them a guaranteed income and future flexibility since the Budget.

For advisers who want flexibility and a guaranteed income for their clients, Mr Perks says recommending a combination of solutions will be one way in which they can achieve this.

However, he says there are already solutions that exist which allow advisers to select investment options that mean their client can achieve a guaranteed income without locking into a lifetime annuity.

Mr Perks says: “Some of the alternative investment solutions on the market allow clients to dis-invest, take an income or switch to different investments as their circumstances change.”

At the current time, Mike Morrison, head of platform marketing for AJ Bell, says annuities are not the flavour of the month and clearly the product will need to innovate to survive.

He says the new proposed legislative structure seems to allow this with a removal of the ability for income to change and on issues such as guarantee periods.

Mr Morrison says: “We may see the growth of deferred annuities as in the US, as well as of new ways of trying to address annuity risk.

“We will undoubtedly see the use of guarantees and structured products in temporary annuities and in so called third way ‘variable annuities’.

“We will also see funds specifically targeted at retirement issues – TDFs (target date funds with changing equity exposure) and other funds aiming to provide long term sustainable growth to address investment risk.

“The key will be to find new ways of addressing longevity risk.”

The impact of innovation will be felt most in the annuity market. The Association of British Insurers’ data shows annuity sales were already in decline before the Budget having fallen 16 per cent in 2013 to 353,000 individual sales worth around £11.9bn.

According to Dominic Grinstead, managing director of MetLife UK, new annuity products could include money-back annuities, more individual underwriting and greater use of investment-linked annuities.

Mr Grinstead says: “Providers could offer annuities that start from later ages and ones that reflect the need for higher income at the start and end of retirement though the success of such products will depend on customer demand, as the addition of features will reduce the starting level of income.

“The current annuity market may change massively but the good things about annuities, including a guaranteed income for life without 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.

“These future retirees could all benefit from new solutions, as could the 21,000-plus new drawdown customers a year looking for certainty on income and capital.

“Other innovations that 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.”

Decisions about retirement income should be made by advisers based on what we know today, says Richard Williams, director of The Annuity Bureau from JLT.

Mr Williams says he is working closely with providers in this market and seeing innovative new products being shaped, including:

1) 12-month annuity fixed-term products with guaranteed capital returns.

2) Wrapped contracts that include a cash account, investment annuity and drawdown account all in one with one annual valuation and one review to keep the product as cost-effective as possible for the retiree.

3) More cost-effective Sipps utilising the drawdown rules, administered mainly via technology to again keep the costs to a minimum to allow them to be effective for even the smallest of pension funds.

4) Annuities with cash-in options and return of capital on death.

5) New deferred annuities covering longevity risk and Mr Williams says annuity purchase may start to be pushed back a decade to age 75.

Further down the line one danger with the most recent changes is that instead of using a pension fund as a way to create an income stream, people see it as a cash fund to be either cautiously hoarded for the future or spent right now, says Stephen Lowe, group external affairs and customer insight director at Just Retirement.

The result is they either don’t extract enough and ‘live poor, die rich’, or take too much and run out at a vulnerable age.

Mr Lowe says these are common scenarios in Australia, which is now considering whether to introduce some form of mandatory annuitisation to ensure pension money is used to provide income that can be spent without the worry of it running out too soon.

However, on a positive note, he says: “As part of the changes the government is introducing Guaranteed Guidance to encourage retirees to be better informed about their options, so we may also see evolution of how clients access information and advice.”