Pension annuities have once again become a topic of discussion, according to Stephen Lowe, group communications director, Just Group.
Lowe explained that annuities are once again being considered after "being dismissed by many for so long in the post ‘freedom and choice’ wilderness".
He said: “Partly due to rising interest rates, improving annuity rates have outstripped the falls in most pension funds, giving annuity buyers more income.
"But also because the classic drawdown solution – the 60:40 equity-bond portfolio – has had a shocking year with both components losing value.”
Lowe said “once in a hundred year” events seem to have become more like “once in a hundred days”, prompting questions about whether traditional thinking remains fit for purpose for the growing numbers of ‘middle Britain’ drawdown investors.
The binary choice presented by the annuity versus drawdown debate is "fundamentally flawed" – not only can individuals hold both, but they can also have one (the annuity) within the other (the drawdown plan), he explained.
“Replacing some or all of the bonds in the self-invested personal pension (Sipp) drawdown portfolio, with an alternative fixed income security (secure income) can create a more sustainable plan - whether that be to deliver more sustainable income or a higher portfolio value.
“2023 is set to see growing interest in these kinds of innovative solutions to the problems of ensuring drawdown portfolios remain robust in the face of economic turmoil.”
A surge in interest
Looking ahead, Lowe argued that 2023 is set to see record numbers accessing pensions for the first time and taking this complex financial step on their own without any professional advice or even a ‘sense check’ from guidance service Pension Wise.
“Another front is being opened up in the form of the Financial Conduct Authority’s holistic review on advice and new proposals for a simplified advice regime, cutting the costs and difficulties of providing advice to the mass market,” he said.
“It is now up to us to make our voices heard and views known on how to make it work.”
In the meantime, he said Pension Wise should be prioritised but currently attracts numbers that are far too low.
“There’s a growing clamour for trials of ‘auto-enrolment’ into guidance, including from MPs on the Work and Pensions Select committee,” he said.
In addition, employees have long seen their employers as a trusted source of financial information and services such as pensions.
“The aftermath of the pandemic and cost of living crisis is accelerating the need for employers to become more actively involved in promoting financial fitness among staff,” he added.
“One of the key trends of 2023 and beyond is likely to be pressure on employers to make financial guidance and advice services available to colleagues so they have the support they need to choose the most suitable solutions.”
Another area of focus will be care, as October 2023 was supposed to see the introduction of important reforms to how people in England are expected to pay for long term care.
“Blink and you missed it as there’s now going to be a delay of at least two years,” Lowe said.
“One of the biggest gaps in most people’s retirement plans is considering the possibility of needing care in old age.”
Just Group’s annual care report revealed people are very willing to bury their heads in the sand – nearly eight in 10 (79 per cent) over-45s and 74 per cent of over-75s agreed they had not thought about care, planned for it or spoken to family about it.
While nearly half (48 per cent) are delaying planning until promised new reforms are implemented.
“The government’s decision to delay the introduction of those reforms from next October to at least 2025 comes on top of at least a decade of delays since the idea of a cap on care costs was first proposed,” he said.
“It means the responsibility for helping people be prepared still sits squarely with advisers.
“It’s been a year of highs and lows but the announcement to delay was a particularly disappointing way to end what has been a challenging year.”
sonia.rach@ft.com
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