This last two weeks has seen an intensive volley of comment, announcements and predictions linked to the changes set to hit the retirement savings world on ‘Freedom Day’ on April 6th 2015 – now just five months’ away. What will F-Day mean for the key players?
What will it mean for financial advisers?
For IFAs it appears to be a potentially huge opportunity to present these new retirement options to the customers. When we asked some 9,000 advisers during the summer what key opportunity for growth they saw flowing from the April 2015 - changes to flexible and capped drawdown was cited as the most likely source of growth by the largest group – nearly a third of advisers said this.
What will it mean for pension product providers and asset managers?
But this success also depends on providers and asset managers coming up with products which are likely to deliver a combination of growth and protected or even ‘guaranteed’ income. There is much to do here.
As one interview with Morningstar’s Dan Kemp explained in the last week there is a great deal of product change to be completed behind the scenes so that funds can deliver income not just growth. In short, all retirement products need to move from a world geared to delivering an income through an annuity to one where your pension behaves much like a bank account.
Ready access, low charging and flexibility become the key watchwords. Those in-retirement will need to have elements within their retirement portfolios which are geared to higher growth. Other funds perhaps should be geared to delivering a cast-iron income at a fixed point which is now likely to be some years after the traditional retirement date – perhaps at 75 when annuity rates are likely to be far more favourable. Providers are already coming forward with solutions which mix higher risk higher return with lower risk funds for shorter-term decumulation.
What could it mean for annuity providers?
Annuity providers already face a gargantuan change in their product line and processes. There is good and bad here for providers. The bad news is that there will be far more going on and far more transactions taking place as a result of the change. Retirement will no longer be a two-step process of issuing the Wake Up Pack six months before retirement date and then administering the tax free cash pay-out and annuity purchase.
Drawdown will become central to the mix at-retirement and because of the complexity of decision-making and the number of options on offer - these options will need to be presented to the consumer perhaps years before the prescribed moment of retirement. Indeed arguably there will no ‘moment’ of retirement but instead a series of phases which will need to be mapped out (and communication plans built around) by adviser and provider alike.
But the latest announcement from Steve Webb around his intentions to offer existing annuitants an opportunity to retrospectively cash up their annuity, goes much further and begs the question can they even do this from a legal perspective as it requires ripping up contracts? There has been much criticism of this idea and Mr Webb stresses he will only press for it after the next election and of course he may well not be in post after this.
What will it mean for consumers?
To answer this question depends entirely on how much is in your retirement pot. Those with less than £30,000 are more than likely to cash out using the new rules governing trivial commutation which allow up to £30k to be extracted at-retirement (as long as it is spread across at least three DC plans). Few are likely to even seek full financial advice before doing so. In an ideal world this group, which is the majority of us, will go to the Treasury’s Guaranteed Guidance (GG) service. We now know that the Citizens Advice Bureau will deliver face to face GG advice and The Pensions Advisory Service (TPAS) will deliver contact centre and web chat-based advice. But no one seems to know how many of the 400,000+ consumers reaching retirement each year, will actually pick up the phone (or their mouse) to use this free service. A recent pilot by Legal & General found only 2.5 per cent of retirees were planning to use it while Mr Webb himself believes some 15 per cent of Middle Britain’s retirees could use the service. Either way, that leaves an awful lot of retirees either looking for full fee-based financial advice or seeking no advice at all…self-guiding if you will.
This is potentially worrying stuff and looks like the Achilles heel in an otherwise noble endeavour of giving consumers more choice of how they want to spend their retirement savings now that AE ensures that some retirement savings are being amassed by the majority.
Natnaje Holt is managing director of the retirement solutions provider Dunstan Thomas
