George Osborne’s bombshell pension changes in this March’s Budget, which enable those aged over 55 to bypass annuities and withdraw unlimited amounts from defined contribution pension pots with effect from April 2015, could have far-reaching implications for product design.
Martin Bamford, managing director of Informed Choice, says: “The new flexibility means needing to rethink traditional investment strategies. It will no longer necessarily make sense to gradually reduce risk as you approach retirement age, as this was originally intended to result in less fund value volatility ahead of purchasing an annuity.
“We expect to see a more phased approach to taking retirement benefits as a combination of cash and taxable income, which means leaving money aside for longer. Pension products that impose penalties, or providers without high administration standards, will fail in this new world where penalty-free access to money at any time and the ability to swiftly process benefit requests will be essential.”
Pension and annuity providers will have to devise new solutions to offset an inevitable decline in annuity business. Just Retirement and LV= are already offering short-term drawdown plans with capital guarantees, but huge opportunities also beckon for asset managers.
Traditional fund management groups have already been working closely with life companies in the accumulation phase to provide simple investment solutions such as managed or balanced funds, but the stage is now set for them to participate in the next phase of the pensions journey.
As one of the biggest problems with annuities is that payments cease on death, the challenge is to come up with an investment solution within a pension wrapper that can be passed on to a spouse or, after tax charges, to other beneficiaries, but which provides a higher income than an annuity and preserves capital against inflation.
With the Budget changes in mind, Threadneedle Investments launched its long-only, unleveraged Global Multi Asset Income fund in July 2014.
Campbell Fleming, chief executive of Threadneedle Investments, says: “I anticipate that the market for multi-asset funds will flourish, with products designed to provide various combinations of capital and income preservation and inflation-beating real returns. In my home country of Australia, where the purchase of annuities is voluntary, the evidence suggests that only 5 per cent of pensioners buy one.”
Other fund management groups highlight existing products that they feel fit the bill. Rob Thorpe, head of UK sales at F&C, points out that the average income from a £100,000 single-life annuity escalating at 3 per cent a year from Standard Life, Aviva and Legal & General for a 60-year-old is only £3,474 a year.
However, the F&C MM Navigator Distribution fund has on average paid out 5 per cent income a year for the past five years while producing a capital return that has matched inflation.
Mr Thorpe argues: “We have already introduced a protection share class to this multi-asset multi-manager fund, which enables your original investment to be guaranteed on death for up to £150,000 of any shortfall. Something like that will be of interest in retirement and these sorts of guarantees will begin to emerge. Pension wrappers have become so simplistic that there’s no reason why asset managers shouldn’t offer them. Some have already offered Sipp [self-invested personal pension] wrappers.”