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Future retirement income innovation

This article is part of
Guide to The Brave New Pensions World

John Lawson, head of policy (retirement solutions) at Aviva, says the new pension freedom rules will alter the retirement income market “fundamentally and forever.”

He says: “Pensions are now the number one savings solution for the over-55s without exception.

“Under-55s should also be putting as much of their hard earned into pensions too in anticipation of the day they reach age 55. In addition to that, pensions are now the estate planning vehicle of choice.”

When asked about future product development, Mr Lawson says the industry has been waiting on the “magic middle-way” for a long number of years.

He says there are already a large number of solutions between pure equity-risk drawdown and annuities, but they all have their imperfections and have never sold in great number because of this.

But just because something has failed to take-off in the past does not mean it should be ruled out by advisers in the future.

The challenge with the changes being brought in will be to avoid entrenched thinking on existing products, says Paul Todd, assistant director of investment at Nest.

There are no direct comparisons with the UK, but Mr Todd says many countries around the world are grappling with the same issues we are facing. International perspectives can be illuminating, he points out.

In the US, for example, Mr Todd says scheme guidance has evolved to allow for different ways of integrating the benefits of deferred annuities into people’s pension planning.

New arrangements are possible whereby savers can pay money as a ‘long life insurance premium’ throughout their savings career, buying chunks of deferred annuity units with their pension contributions, he says.

Mr Todd says whatever solutions are developed here in the UK the most important factor will be how well they meet savers’ needs and expectations.

Paul Evans, pensions technical manager of Suffolk Life, says all product areas are likely to see innovation as a result of the greater pension freedoms being brought in.

However, he says that while an open mind is needed the changes coming in from April do not necessarily mean that new products are required in order to service client needs. For many, he says the current product suite will be sufficient.

Other clients may prefer solutions which have evolved to offer some new features, Mr Evans points out, such as annuities offering as ‘u-shaped’ income patterns or wider succession planning options.

Many providers will look to offer a range of solutions to provide annuity-style income security, but through income drawdown, he adds.

Unit-linked guarantees underpinning drawdown plans have been available for some years, but Mr Evans says alternative investment solutions are emerging, for example, using diversification to counter regular income withdrawals.

Alternatively, he says the plan could purchase short-term annuities at periodic intervals, leaving the remainder of the fund untouched.

Technological innovation will combine with the more relaxed pension framework to provide more versatile solutions for clients, Mr Evans adds. The quality of information that can be obtained online will improve, he says.