A lack of innovation was a concern for the FCA in its MS16/1.3 Retirement Outcomes Review Final Report, published in the summer of 2018. Two years later, the truth is, not all that much has changed.
The two key options at retirement remain:
Lifetime annuities – The only way to guarantee a specific level of income for life in retirement.
Drawdown – The flexibility to take benefits in line with Pension Freedoms as the client so wishes.
Defaqto’s independently conducted survey of 486 advisers in Autumn 2019 showed that flexi-access drawdown for clients made up the largest volume of advisers’ retirement income solutions by value in the preceding 12 months at 85%, while the next largest figure at 9% was lifetime annuities.
It is not surprising given that drawdown offers so much flexibility and because annuity rates are historically low, that it has become the overwhelming choice of many.
However, it has to be considered that there are certain circumstances when the security of a regular level of income would be beneficial.
For this reason, some advisers have begun to use a blended approach to their advice, using an annuity for those ‘must meet’ expenses and drip-feeding of drawdown for the others.
Advisers, understandably, will feel that their worth is in utilising their expertise to create a financial retirement plan for their clients using the traditional products made available.
However, they should always consider the other options - they have a responsibility to consider the whole market.
The aforementioned Defaqto adviser survey does state that 17 per cent of advisers had recommended unit-linked hybrid products in 2019 with 16 per cent saying they had recommended fixed term annuities in the same period – noting that annuities were only 9 per cent. We will touch on these alternatives in a moment.
However, less than 10 per cent of business volume at retirement was in anything other than annuities or drawdown.
As mentioned, this may be because advisers feel they can blend a solution for the client using existing products. Indeed, there has been a challenging history for alternative solutions which have been launched with much fanfare but have since been closed.
What are the alternatives?
Unit linked guarantees
Hartford Life and Lincoln were originally in this market but exited over a decade ago. More recently, they have been offered by Aegon; AXA Life Invest and Metlife but these have now all closed, meaning this market no longer exists.
The idea behind these products was that any growth in fund performance was locked in by the client, with the provider mainly using fixed interest securities.
Low interest rates since 2008 and the impact they have had on the cost and returns of gilts, for example, meant for providers the cost of these guarantees ultimately became prohibitive – indeed, it was this that was blamed by some of the providers who ultimately exited the market.