Getting a fresh perspective

Emma Ann Hughes, editor, FTAdviser.com & Financial Adviser, chaired a panel featuring Steve Webb, head of policy for Royal London, Billy Burrows, founder of Retirement Intelligence, and Ben Gaukrodger, manager for savings policy for the Association of British Insurers.

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Emma Ann Hughes: Do you think the reports of the death of annuities were greatly exaggerated?

Steve Webb: I think they were. There was an initial hit for people who were about to buy an annuity but suddenly realised they didn’t have to following the 2014 Budget. But even now we are starting to see a recovery in the volumes of sales.

I think we will see annuities being bought later into retirement or perhaps as part of a hybrid product in which people are able to carry on benefiting from investment growth but receive greater certainty on their income as they grow older.

EH: We have received a question from a True Potential adviser. The question is: what do you think of the take-up of pensions freedoms so far? Do you think it has not been as great as some anticipated?

Billy Burrows: The first take-up has been from people who have been interested in taking their money as cash. There has also been a substantial take-up in people enquiring about drawdown.

I think generally, there has been a good take-up and more importantly, it has engaged people in their retirement income options.

EH: Ben, the ABI has produced a lot of statistics on this. Did they come as a surprise or were they in line with your expectations?

Ben Gaukrodger: I think it is what you’d expect. There was a delay before the pension freedoms came into effect. You’d expect people to hold off for there to be some pent up demand and we have seen that.

The latest ABI stats show that more and more people are buying annuities or going into drawdown products rather than taking cash and I think we will be seeing more of that.

The last quarterly statistics were informative in that more people are buying an annuity than a drawdown product for the first time since the freedoms came into effect.

EH: Is there room to suggest that while providers are likely to continue to struggle with the fallout of pension freedoms in the short term, annuities should still play a big part in retirement income recommendations for years to come?

BB: People are stuck between a rock and a hard place - low annuity rates and volatile stock markets. There is a very strong case for annuities and that case is more sophisticated. The technical side says that mortality cross subsidy does not kick in until later, while the emotional side says as people get older they want to de-risk, so annuities will still be with us.

EH: Ben, do your members still see annuities as a core part of what they offer?

BG: Absolutely, and they will remain a core product. As I mentioned before, the number of annuity sales is increasing quarter-on-quarter and the amount that is going into them is increasing. The ABI statistics shows that the average pot being used to buy an annuity is £51,000 across the market which is significantly higher than it was.

It is still a product that will provide value for a lot of people. It will not be perfect for everyone but is something that everyone should be considering.

EH: So is it good advice to consider an annuity first then consider other options?

SW: It should certainly be on your list. Obviously a lot depends on your attitude, age and your health – there are a lot of things to think about. I hope one consequence of the shake up of the market will be more people getting enhanced annuities.

EH: A question has come in from another IFA who has tweeted: FAMR [the Financial Advice Market Review] suggested tackling the advice gap with streamlined advice which could see the banks getting involved again. Do you think banks returning is a good thing?

BB: I have nothing against the banks getting involved but they must do it properly and that is the difficulty because they have not shown they have the resources to advise properly.

BG: I have no problem with banks getting involved. It is not an issue of who is delivering the advice but the quality of the service that comes through.

SW: For us the key word is impartiality. Advice is crucial in enabling people to look across the market, get the best products from the best providers. Would consumers get a full range option if they sought advice through a bank? Probably not.

EH: Having to handle insistent clients is a day-to-day reality of pension freedoms for advisers. If they follow the FCA’s three-step guide, would there not be any potential repercussions?

BB: It is fine in theory but more difficult in practice. You have to feel sorry for advisers because it is hard to give advice when you are looking over your shoulder all the time.

SW: The worry is that the standards of today get applied to things that were decided yesterday. So there is a risk of someone approaching their adviser years down the line and saying ‘no you really shouldn’t have done that’ when they have acted in good faith today. I can understand why people are very cautious about giving advice in those circumstances.

EH: We have had a question come in from an adviser called James Dean who asks: we have recently had more details on how the second-hand annuity market is going to work. Does the panel think it is going to work well based on the rules that have been outlined?

SW: I guess the key question is on consumer protection. There is a set of people for whom this is a perfectly valid option. For example if you have secured a decent level of income already, and the pension pot was something you would rather not have annuitised in the first place, you can now turn it back into capital.

The boffins can’t work out what the right value is but if several people are after your annuity, then hopefully you can get a competitive price.

EH: Ben and Billy do you anticipate your members entering this market?

BG: I guess we will see. The FCA consultation into this has highlighted that there are a lot of things that need to be sorted out between now and April next year when this comes into effect. I think the key thing for the market as a whole is about how quick those outstanding issues that have been highlighted are sorted out because it is largely going to depend on the risk the individual providers are going to be prepared to take, and the consumer protection mechanisms.

BB: This is a step too far. The unintended consequences are going to be far reaching and I do really worry that people who have got an annuity that they rely on to maintain a certain standard of living will be tempted to take the cash and find themselves in hard times later in life.

EH: Ben, why do you think the Government has back-tracked and did not introduce the long rumoured Pensions Isa?

BG: I think the key thing was a lack of consensus. There were a lot of people supporting a flat rate in tax and pensions tax relief. There was also a clear focus from the Treasury on Pension Isa and the fiscal windfall that might provide giving the state of the nation’s finances, but I think there was very little support for that and it came with a lot of risk.

Auto-enrolment is still being rolled out and there was not a lot of public support for the Pensions Isa. You also have to look at the political situation the government is facing at the moment. The Government has an EU referendum coming up and it has a small majority in the House - which do influence the appetite for pursuing a bold set of reforms like a Pension Isa.

This set of circumstance won’t stay in place forever, so looking ahead to the autumn statement or to next year’s budget, there is absolutely the chance of the Pension Isa rearing its head again.

SW: Treasury sources are saying the Lifetime Isa, is not a Trojan horse but as I recall it, they didn’t label the Trojan horse ‘I’m a Trojan horse’.

I think they will trial the Lisa. If it is popular they can see how it can be expanded – why under 40, why not under 50. I think this is almost a dry run for Pension Isa.

EH: What are the panel’s views on the Lisa? Is it a fantastic extra bit of kit in advisers’ toolbox, or is it a potential nightmare in terms of the 5 per cent exit fee charges?

BB: It is a difficult one because the first port of call for pension savings is in a pension. I think it is complicated and advisers just want certainty so that they can plan ahead.

EH: We have had a question in from an adviser called Ron Head. He asks: have providers been innovative enough in terms of retirement income solutions?

SW: It is early days. My sense both from joining Royal London but looking across the industry is you had got companies in the run up to April just trying to be legal, trying to make sure their products allowed all the different choices. Since then, providers have started to look at new permeations and more hybrid products.

BG: I completely agree. Getting ready for April 6 last year required huge effort from the industry and I think providers did a good job to ensure they were in compliance with the huge set of reforms. We will see a period of innovation now - I think it will be quite an exciting time for pensions.

EH: Do you think there has been enough innovation and have providers successfully adapted their systems to allow people to properly access the pension freedoms?

BB: The industry is littered with people trying to do things in the middle that haven’t really worked.

I have great interest in the so called guaranteed drawdown option - I think they would work. I still believe, and I am in the minority, that good solutions for many people are investment-linked annuities. The most interesting bit of innovation will be on deferred annuities. They use them in the US and it makes planning for drawdown much easier because you know that all you need to do is get to 85 then you are home and dry.

SW: One of the areas we have been looking to innovate is on investment strategy because if people are looking for income, and with rates of return very low, there is a danger they go for high risk to get high income. What we have been innovating on is on the whole area of multi-asset investment that gives you that reduced volatility because you are spreading the risk, and then you draw income by taking the capital units out of your retirement account.

EH: Do you think enough is being done for those in the accumulation stage?

BG: Figuring out what is going to be the right default strategy for the customer base is going to be difficult. It depends when an individual plans to buy an annuity, it depends at what point they are taking a product.

BB: The new buzzword in retirement is ‘journey’. People are still getting their minds around how this ‘journey’ is going to pan out and of course it has changed a great deal. The only point I make is how can you have a sensible investment strategy in the run up to retirement unless you have some idea of what you are going to do in the other end?

EH: How do advisers help their clients come to terms with the reality of retirement?

BB: It is all about income planning, clients would say it is difficult for them to do these cashflow forecasts but once they’ve done them, they are in a much better position. The best thing an adviser can do is help their clients take a longer term view of what their retirement objectives are.

EH: Steve, how does an adviser make sure that the client doesn’t just think ‘I’ve heard I can take tax free cash, wonderful, I’m going on a cruise’?

SW: Ros Altmann has spoken about getting people who are aged 50 engaged with their pensions which would be a big step forward from where we are now. Certainly, you need to engage people when they are old enough to be interested, but young enough to have time to do something about it.

EH: A question has come in from Matt Walne who says pension accumulation is becoming more and more difficult. Is that something the panel would agree with?

BG: In parts yes. The change away from DB to DC means that people now have to be more engaged with their pensions. Auto-enrolment has been a huge success in helping younger people save for retirement and the industry will work hard to ensure it continues to be a success.

EH: Steve, do you think the accumulation process is going to get simpler?

SW: In the Budget, the Chancellor was saying the under 40s have not been well served by pensions so here is a Lisa. That does not make thinks simpler, that makes things more complicated.

We have got the Treasury who is interested in saving, you got the DWP doing workplace pension and really, they need their heads banging together.

BB: In many respects it is easier to buy a pension. I think the problem is pensions are still not exciting or sexy enough and we have to find a way in engaging people with their pensions so they take some ownership and interest.

EH: Do you think AE will help with this, or will it be the case of the Australian experience where people sleepwalk into engaging with their pension once they have accumulated a big enough pot?

BB: You have hit the nail on the head. One you’ve got a decent amount of money it becomes real, and I think that AE is a step in the right direction.

BG: DB schemes put the pensioners’ worth in numeric terms on a pension statement – people take a lot more interest in it. And I think the same will happen with DC.

EH: So you think once people are able to see the amount of money with their AE, they will become engaged?

SW: To a point but it is going to be glacial if we are not careful. We are still only at one per cent on one per cent contributions. It will rise to 8 per cent by 2018 but even that is not on all of your earnings – we have to get beyond that, otherwise it will be decades before we get realistic amounts going in.

EH: So many interesting points – thank you. We have seen a sea change on how people can access their pension pots but not in individual behaviour and habits. Huge swathes of money are still heading towards annuities and there has been a lack of product innovation – although some are starting to filter through. Whether the Government will make more changes to pension taxation remains to be seen. Thanks to our panel, Steve, Ben and Billy for providing their insights on this topic.

Panel

Steve Webb

Prior to his role at Royal London, Steve Webb was an MP between 1997 and 2015, and famously served as the pension minster in the Coalition Government between 2010 and 2015. He previously worked as a professor of social policy at Bath University.

Ben Gaukrodger

Ben Gaukrodger joined the ABI in 2012 to the role of policy adviser - a position he held for nearly three years. He previously worked as a policy analyst for the New Zealand Treasury and Economics Tutor at the University of Canterbury.

Billy Burrows

Billy Burrows has been involved with annuities for over 20 years. In 1993 he established Annuity Direct and in 1997 set up William Burrows Annuities. In 2014 he became associate director of Key Retirement Solutions.