Blended retirement products are the future, according to industry commentators such as Mel Kenny, chartered financial planner for London-based Radcliffe & Newlands.
He said low annuity rates and pension freedoms have steered the industry into providing solutions that meet essential, desirable and bequeathing needs.
Mr Kenny said: “This has been done as a cost-effective, all-in-one solution for those with smaller pots of money, through to advisers breaking it down into the individual components for larger amounts of pension savings where feasible.
“But for many savers, their entire pension would be used to meet essential needs, and the default income solution of a lifetime annuity is a bitter pill to swallow given the miserly annuity rates on offer. Pension freedoms enable these savers to top up their income, but it opens up longer-term income risks for those with it.”
The demand for blended retirement products is often seen as an indication that clients are becoming more aware of the alternatives to standard lifetime annuities.
It also follows on from April 2014, when George Osborne, the chancellor at the time, announced that people would have greater flexibility when taking their pensions funds.
These changes came into effect in April 2015 and have already prompted many retirees to reconsider their retirement choices.
In the past, the pensions market offered two options. The majority traditionally bought an annuity, which guarantees income for life. But on the downside, there is a lack of flexibility should a person’s circumstances change. Also, there is little benefit upon death to the person’s family.
Key points
- The demand for blended retirement products is an indication savers are becoming aware of alternatives to annuities.
- Several providers have launched hybrid products that contain both a self-invested personal pension and an annuity.
- People can take responsibility for shaping their income in retirement to best suit their needs.
Income drawdown
The other option, which was traditionally chosen by a minority, is to take an income drawdown. This offers flexibility, as it allows income to go up and down. But the downside is that the retiree can run out of money, which makes it a riskier proposition.
Now there is an increasing interest in marrying the two. To accommodate this, several providers have launched hybrid products that contain both a self-invested personal pension (Sipp) and an annuity.
This comes as no surprise to research analyst firm Spence Johnson, which predicted that providers will draw on their annuity and drawdown offerings to create blended products that balance certainty and flexibility in packaged solutions for the mass market. It added that advisers will also create blended solutions for both large and small pots.
It said pension freedoms will continue to drive rapid change in the UK pensions market, as it grows from £699bn in 2014 to £1.1trn by 2024.
Rob Kelly, an analyst at Spence Johnson, said retirees’ two main demands from their pension are certainty of income and flexibility to access their funds as they wish. But these are often in conflict.
He said: “Blended products, by combining an annuity with an investment to draw down from, are one solution. The annuity can provide a certain minimum level of income, while the drawdown account remains invested and can be flexibly accessed.
“One example of a blended product is Retirement Advantage’s Retirement Account. It allows the retiree, with the help of an adviser, to choose how to split assets between the annuity and drawdown. It is also straightforward, with all payments flowing into a single account. But only a limited selection of funds – about 15 – is available for investment.”
Advisers can create their own blended solutions for clients, he added, by combining an annuity with a drawdown product. This is not a single blended product, but a mix of products chosen and blended by the adviser.
Mr Kelly added: “Which solution to choose will depend on both the size of the retiree’s pot and the level of complexity they are willing to go to.
“Those with larger pots, or who desire a more tailored solution, may wish their adviser to create a personalised blended solution.
“Alternatively, retirees with financial constraints or who desire simplicity may favour a product like the one above.”
Personal choice
Kate Smith, head of pensions at Aegon, said that pension freedoms have heralded a new era of personal choice. But with that comes both opportunity and risk.
She said: “People can take responsibility for shaping their income in retirement to best suit their needs, but these decisions can be complex and it is possible that people will make the wrong choices and risk running out of money. Retirement is getting longer and more varied, so it’s vital to help people balance flexibility and security.”
Ms Smith said it was in response to this that Aegon developed its drawdown with guarantees product, Secure Retirement Income. This combines the best features of both drawdown and an annuity by giving people flexibility, with a base level income guaranteed, and access to their remaining capital if they need it. Its key attraction is that it gives peace of mind without sacrificing the advantages of drawdown.
The latest Willis Towers Watson figures show growth of around 60 per cent over the last two quarters, to reach £227m in premiums for the first time since Q2 2015.
Ms Smith said this is a strong indication that the market is finding sure footing following the pension reform.
LV= has also been at the forefront of developing blended retirement products. This includes the LV= Retirement Account, which offers advisers a full spectrum of retirement blends to meet their clients’ need. The LV= Flexible Guarantee Funds Bridge is one of its packaged hybrid solutions.
Philip Brown, head of policy at LV= said blended solutions are becoming more popular, as people are living longer.
He added: “Retirees are now opting for a mix of income flexibility and stability, and wanting products that can meet their changing needs. One particular product we have has seen an increase in demand for is our fixed-term annuity, which allows people to receive a guaranteed income for a set period, then reassess their options at a later date.
“The industry has responded to the freedoms with products that allow consumers to blend multiple solutions under one product wrapper. But this choice increase means it’s vital that people take financial advice to help them find the right product.”
Aamina Zafar is a freelance journalist
