Paul Todd, assistant director of investment at Nest, says the 2014 Budget has created a once in a generation chance to really figure out, from the ground up, how to make defined contribution savings work in retirement.
He says advisers now have an opportunity to look at more flexible solutions, to meet the needs of the majority of savers. Mr Todd says: “There is clearly scope for innovation and a debate to be had around the role of ‘default’ options.
“One of the debates we’re having is whether we need more than one default strategy for different types of member, and which variables can be reasonably used to differentiate member needs in the event of no member engagement.”
Previously the default option was to buy an annuity, often with the original pension provider. Now ‘defaults’ are going to change for different client segments, with the whole concept of having a default strategy in question.
The FCA is now talking about “rules of thumb” with default retirement income options, according to David Trenner, technical director of Intelligent Pensions, who adds these will be important.
For people with small funds Mr Trenner says the default will be cashing out – possibly in the tax year after their income ceases.
For those with very large funds, Mr Trenner says drawdown will be the default. For those in between, he says there should be no default as options will depend on personal circumstances.
John Lawson, head of policy (retirement solutions) at Aviva sayslLow-risk clients and those with limited savings are still likely to prefer the certainty of guaranteed income for life, while those who are less risk-averse or who have a large stock of savings relative to their income need will prefer income drawdown.
While those with limited savings may be attracted by the lure of the new death benefit rules, Mr Lawson says the realistic chance of passing on significant amounts to their heirs may be limited and this needs to be considered before such clients opt for drawdown.
The FCA expects that advisers conduct their own research regularly to ensure that their product knowledge is up to date, and to ensure they know when a more detailed fact find is required, says Paul Evans, pensions technical manager of Suffolk Life.
He adds they also expect that the client’s position is reviewed regularly where a higher risk solution has been recommended.
Mr Evans says 2015 will see the launch of a number of new retirement product options, or revised features being incorporated into current solutions, making it vital that advisers check whether what was once the default option is still in place.
He says adviser businesses will need to obtain product information for both current and new products, which they can assess in order to understand how the product works, and what may have changed.
There should not be a default income option in 2015 as there are many personal issues that need to be assessed before deciding how and when to take income, says Claire Trott, head of technical support at Talbot and Muir.