Combined solutions

With the FCA reviewing the Association of British Insurers’ open market code of conduct, it would be great to see the narrative move away from annuities, and instead focus on the full range of retirement income options that exist. Importantly though, not all annuities are bad, not all drawdown is good – so it is about making the right choices, or indeed combinations of choice.

While it is difficult to predict how pensioners will respond to the new retirement landscape, we do expect those approaching retirement with smaller individual pension pots to take their cash out as a lump sum.

In the days that followed this year’s Budget there was much talk about the death of the annuity. However pensioners have not had to annuitise since 2011 following the abolition of compulsory annuitisation at the age of 75, yet they remain a popular option. The FCA’s review of the annuity market is that they do offer good value and we strongly believe that enhanced and investment-linked annuities will remain a valuable solution for many, due to the certainty and guarantees that they provide.

This is supported by research which found that three quarters of pensioners want a solution that offers them the security of a guaranteed fixed income for the rest of their lives. This suggests that many fear outliving their pension pot.

However, while traditional products will still have a place, it would be reasonable to expect an increase in people looking at alternative solutions, particularly if the message that people now have greater choice is communicated successfully.

We have already seen an increase in demand for income drawdown as it has become a far more accessible and attractive proposition for advisers and their clients. Income drawdown will undoubtedly become a mass-market product for those who want the flexibility of being able to change their future income as well as those who have additional sources of income (for example, those who are still working and/or want a more tax-efficient way of accessing their retirement savings). What will be crucial are the solutions that are part of the drawdown constructs.

Prior to the Budget we were starting to see advisers combining solutions to maximise their clients’ income – typically, two types of annuity. Since the Budget providers have been approached by advisers whose clients want a guaranteed income and future flexibility and are considering combining an annuity or other insurance style product with a drawdown solution. Initially this has seen the rise of the fixed-term annuity, a single product offering guarantees within a flexible construct. We expect this to continue to rise in popularity, but more tailored propositions will also be available.

In the new world, we expect to see more pensioners using a combination of retirement income solutions to get the income flexibility they require. Indeed, we anticipate a rise in annuity and drawdown blends from next year, especially now the death benefits on annuities and drawdown have been equalised. This means that when someone reaches retirement they can take advantage of risk-sharing and use a combination of solutions to fund their retirement, safe in the knowledge that their loved ones will not face a huge tax bill further down the line.

Recent industry figures on annuity sales show that while external annuity sales have fallen dramatically, internal sales remain at the same level. These statistics indicate that far too few people are shopping around and making the most of their pension savings. The open market annuity has failed and has therefore failed consumers. We need to ensure that the new open market retirement income is more successful, and the FCA’s intentions around ensuring good customer outcomes bode well.

We believe financial advice at retirement can significantly boost clients’ income, but many people are reluctant to seek advice. While guidance may be sufficient for individuals with small pension funds, we believe that it is essential that, where appropriate, guidance firmly encourages individuals to take regulated advice. Take-up of guidance may be low initially, but we must build from here and providers need to ensure that we highlight the value of this service to our customers so that they either access it and in turn access advice, or directly access advice.

April 2015 will be a watershed. The Budget has given the retirement industry the opportunity to build on the renewed interest in the pension market, boost engagement and prove that we can be customer-focused, trusted and vital.

John Perks is managing director, retirement solutions of LV=