The International Longevity Centre UK commissioned a survey of some 5,000 55-70 year olds, found that roughly 40 per cent of people with less than one year to go until their planned retirement had actually made a retirement plan and only 35 per cent actually understood what drawdown meant. For some 70 per cent, a secure income in retirement is their top priority – an income which is presumably not exposed to the vagaries of the stock market or macro-economic outlook.
A second survey by YouGov with an even larger sample, confirms the continued desire to secure income in retirement. So for many of these people an annuity still looks like the best bet. So should our real focus be on ensuring that the majority of pensioners that are likely to be annuity purchasers are:
1. Using the Open Market Option,
2. Exploring how to optimise that annuity by declaring any medical conditions which might give them access to an enhanced annuity
3. Exploring the positive impact of delaying annuity purchase thereby opening up the potential for a more generous annuity settlement, and even
4. Exploring a rash of new guaranteed annuity products that will emerge as 10-year limits on guarantee periods are lifted?
But reading between the lines of these survey results, it is also clear that there is a massive amount of education that is still needed as baby boomers in their droves (perhaps 650,000 per year for the next few years) reach retirement age still consider retirement is a one-shot deal – that is, thinking that at 65 years (or ideally sooner) “I will stop working and start drawing on my pension”. In other words there is still a clear propensity to ‘cash out’ (that is, buy an annuity straight away or take a large lump sum) when, in most cases, these options will make them worse off in retirement by doing so.
The danger therefore is too many people will only get enough information and advice about the new pension freedoms to stimulate more of them to cash out - picking up an unnecessarily large tax bill and exposing themselves to a higher risk of running out of money even before they reach their final, frailer years when they really will need to depend on these funds.
To be fair, the options are complex. Capped drawdown (currently set at 150 per cent of annuity value of a pot) will be converted to Flexi-Access Drawdown funds come 5 April if the capped drawdown policyholder exceeds their limit. By doing so they trigger the new much lower Money Purchase Annual Allowance of £10,000. So suddenly many drawdown policy holders going down the FAD route may find themselves facing a tax bill if they take advantage of their new found freedoms. FADs also replace current flexible drawdown funds. There will be no restrictions on the amount of withdrawals permitted from FADs.
A whole new pensions pot access offering, snappily-titled UFPLS (Uncrystallised Fund Pensions Lump Sum), opens up the potential for retirees to draw money out of their pension without crystallising their pot. In other words they can go on paying into it while beginning to draw an income from it. This option clearly makes good sense in a world where people approaching retirement need to be encouraged to phase their retirement – deriving some income from part-time work and topping this up with income from their pension, while continuing to save surpluses for later on. UFPLS usage will however also trigger the reduction of MPAA to £10,000.
We think providers may struggle to offer UFPLS anyway without investment in new technology. New FCA rules, set to come through just before April 6th 2015, will put up another hurdle to smooth administrative processing of these new flexible withdrawals, unless providers get access to the latest tools.
Then there are new retirement products being rolled out almost daily, only adding to the confusion which, as we know from our communications theory, only tends to lead people to go back to what they know already which clearly is not very much if those surveys are to be believed.
What is clear is that the retirement market has just got a whole lot more complicated for those approaching and planning for retirement as their choices increase exponentially; while access to decent financial advice still seems to be in retreat post-RDR. These factors, combined with pensioners’ propensity to cash out, suggest we need more safeguards (beyond the guidance set to be offered by TPAS and the Citizen’s Advice Bureau) in place to make sure the choices that people make at-retirement do not make them worse off later in-retirement.
Natanje Holt is managing director of Dunstan Thomas
