It’s time we put our heads together

For most providers across the industry, as well as updating systems and processes ahead of the pension reforms, the key business priorities were to ensure that those reaching retirement ahead of the April 2015 freedoms were not disadvantaged and were also able to access relevant products.

The immediate to short-term response led to a number of initiatives aimed at good customer outcomes – such as increased cancellation rights and rate guarantees for those customers that had just purchased annuities and the launch of one-year annuities that served as a transitional proposition for those who wanted to take an income ahead of the pension changes coming in, but did not want to be stuck in a lifetime product. We also saw the advent of low-cost drawdown solutions and flexible guaranteed funds.

Immediately after the Budget the sale of lifetime annuities fell, with many pension savers deciding to defer purchasing a long-term retirement income product until the pension freedoms came into place.

The interim rules that were implemented made income drawdown more attractive and, more importantly, more accessible to those approaching retirement who wanted a solution that offered them so much more flexibility.

We are now more than two months into this brave new world where pensioners have so many more options and, more fundamentally, a very real decision, one that most had not even had to contemplate.

Although it is too early to outline the far reaching impact of these changes, industry figures show that since last year’s Budget there has been an increase in demand for drawdown and a fall in lifetime annuity sales.

In the days immediately after April 6 providers took thousands of calls from customers. The calls could be broadly split into two camps: those who had read about the pension changes in the weekend papers and were looking to find out what the new landscape meant for them and wanted more information on the options now available to them. The other group were customers who wanted to cash in.

Among those who wanted to cash in, a significant proportion changed their minds once they realised that there were potential tax implications of doing just that. In fact, almost half of those who wanted full encashment had not realised that taking their money as a lump sum could impact their tax position. The majority of customers who chose full encashment even after they had been made aware that they may have to pay a higher rate of tax wanted to access their pension fund in order to repay outstanding credit card debts and mortgages.

One of the recurring themes among those approaching retirement is the fact that people want greater income flexibility; many also want a guaranteed element to their income. This is completely understandable as for many people their pension fund is one of their largest assets, after their home, and once they have exited the workplace they cannot easily rebuild this fund should they make a decision that significantly erodes their capital.

By combining products rather than bundling features into a product, there is the potential to achieve this without delivering new more complex products to market that risk mid-market customers buying into risk (and cost) that cannot be readily understood.

A small number of advisers have requested a combination of income options, for example a lifetime annuity and income drawdown, for their clients in order to achieve the combined aims of flexibility and guarantee prior to the Budget. Under the old rules the option of combining products was only accessible to the few, with most advisers considering drawdown unsuitable for those with pension pots of less than £100,000. Now that the minimum income requirement has been removed drawdown has become an option for everyone and providers have seen an increased demand for a blend of solutions.

Interestingly while annuity sales volume have reduced, there are clients out there who still want to secure a level of income in retirement and we expect annuities to continue to play a role in helping pensioners to fund their retirement.

From what we are seeing, lifetime annuities are being used to provide clients with an income they can use to pay their essential bills and day-to-day living costs alongside income drawdown which is being used as a lifestyle or discretionary fund which they can use for big ticket items such as holidays and home improvements.

Given that annuities are still in demand, it is important that among all the noise about the new freedoms and flexibilities we do not forget to highlight to savers how important it is to shop around for the best annuity in the market and make them aware of the benefits of purchasing an individually underwritten annuity in order to make the most of their pot.

It feels like an eternity since Steve Webb, the pensions minister at the time, discussed the need for “switchable annuities” and it was clear then that switchable annuities could be a great solution for certain customers and already existed in the shape of fixed-term annuities.

Providers have seen a significant increase in fixed-term annuities purchase as savers continue to look for a more flexible way to secure a level of income for a period of time while retaining the flexibility to change the shape of income in the future if circumstances change.

While no new products have yet to be launched there is likely to be further innovation in the drawdown and annuity space and we could potentially see the launch of guaranteed drawdown solutions that aim to smooth returns and limit the risk of investing in a similar way to with profits policies and products that smooth returns and guarantee capital.

In delivering solutions like this to market providers must make sure that costs are transparent so if customers are buying into a capital guarantee they understand what they are being charged for this peace of mind. This is critical as in the long-term performance will be judged by the return that has been delivered.

And there remains the longevity question, for those choosing a fund-based income solution they are choosing to take on the longevity risk. It remains to be seen whether the industry will deliver a palatable solution to this as history has shown that it is a challenge to encourage people to give up something now to protect against something that may or may not happen in 15 to 20 years’ time.

In my opinion, the Budget has helped to provide those approaching retirement with a better outcome, not only because it will be the catalyst for product innovation, but because it has made pension savers engage with the market and made them more aware of the options they have at retirement.

With savers now more interested in their income options, providers anticipate that more people will shop around and consider the alternative income solutions now available as a result of the freedoms and improve their income outcome.

Although the new rules may have changed customer-buying behaviour it has not actually changed what people desire in retirement - a solution that makes the most of the pension fund they have spent decades amassing.

In the main, the products that exist in the market meet the needs of today’s pensioners and are now far more accessible. Our job is to work together as an industry, with advisers, to help clients select the combination of income solutions that will afford them the retirement they want.

Vanessa Owen is head of retirement products at LV=

Key points

The immediate to short-term response to pension freedoms led to a number of initiatives aimed at good customer outcomes.

Immediately after the Budget the sale of lifetime annuities fell.

One of the recurring themes among those approaching retirement is the fact that people want greater income flexibility.