Personal Pension  

Reform spells healthy future for advice

To reflect changing retirement patterns and provision, DC schemes need to offer flexibility. Individuals want the flexibility to postpone retirement and/or phase pension income, to align with continued participation in work. These are two fundamental ways for individuals to manage the risk that pension income will be less than they require. Flexibility to integrate the Nest pension with other pensions so that the total pension income is level could also be beneficial. Individuals also want to have their money when they need it. In other words, they require flexibility in terms of sequencing. For example, individuals may want a lump sum when they retire to update their house, buy a new car or go on holiday. They may also need an increased income towards the end of their retirement if they need to fund care costs.

It is clear that the next generation of products need to enable ongoing advice. As the circumstances of the retiring individual evolve, their retirement solution must have the ability to adapt, so that they can respond dynamically to changing needs.

Given an individual’s need for certainty in retirement, we expect guarantees to remain in demand for at least part of their solution.

The purchase of an annuity should certainly remain part of retirement planning for DC members. Indeed, annuities are likely to play a continuing role for some individuals due to the guaranteed income for life they provide. However, at least in their current form, they often lack flexibility. Furthermore, while annuities deliver certainty in some regards, an individual’s overall return from an annuity can be highly uncertain, as it depends very much on how long the member survives after the purchase.

The continuing preference by many for some degree of guaranteed income needs to be addressed alongside the rising demand for solutions enabling individuals to address a range of alternative goals – for example, the ability to provide an inheritance. Given this, we expect further innovation in the annuity market as well as the increased use of alternative solutions such as unit-linked guaranteed products.

Other points of note are: the inflation protection available in annuities today (RPI- or CPI-linked) is not necessarily appropriate for pensioners’ spending patterns; and a phased approach to the purchase of income guarantees, through phased annuitisation, fixed-term annuities or deferred annuities, can have some advantages for members in certain cases.