Retirement income – clients’ two top priorities
Multiple solutions can help solve the growth and security conundrum, says Barry Cudmore, managing director, Aegon Ireland
Ask a client about their hopes and fears in retirement and no two responses will be the same. Never more so than in the current climate where retirees are facing an uncertain economic outlook, the prospect of living longer, and more choice about how to access their pension savings than ever before.
The pension freedoms gave people new powers to take their money as they wished, and in this new world, drawdown has quickly become a more popular retirement income option than annuities with £6.1 billion invested in drawdown in the first year since pension freedoms landed in April 2015.
However, research we conducted shows that in the new landscape, retirees’ concerns include rising inflation, meeting care costs and running out of money. It’s perhaps unsurprising therefore that the top things retirees value in later life are flexibility, the ability to change income to suit changing needs, and security, a guaranteed income for life. For advisers, these needs are fundamental to any conversation around product suitability if clients are to have the retirement outcomes they want.
The popularity of drawdown suggests a high proportion of pensioners are relishing flexible options, enjoying the ability to access their cash, while also exposing their funds to the stock market in the hope of market gains. But this option doesn’t incorporate the security a significant proportion of the retiree population still seeks. Conversely, although the alternative option of an annuity guarantees a secure income, it provides no form of flexibility whatsoever.
New products are available, designed to meet this middle ground, which combine the best features of an annuity, and naked drawdown. One such example is drawdown with guarantees. This is where retirees in drawdown are able to secure a fixed level of income for the rest of their lives. This approach allows people to have the flexibility to meet lump sum costs both expected, and those that come as a bit of a surprise, by drawing on money that they have invested in drawdown but with the knowledge they will get an income every year, which can be dialed up or down depending on the individual’s needs.
But these best of both solutions have proven slow to become a mainstay in the adviser’s toolkit. However, there is a growing uptake and appetite for these products and this momentum is something we expect to see continue through 2017 and on. A report from Spence Johnson – UK Retirement Income Market Intelligence 2014 – projected guaranteed products would increase from £18bn to £48bn by 2023.
According to a report by the lang cat many advisers question the cost of these new products. Of course advisers want the best for their clients, and have a fiduciary duty to ensure that they have the most suitable solution to meet whatever circumstance they find themselves in. Therefore the report states that unless a client is aggressive in their attitude to risk (and has a high capacity for loss) they believe an alternative to full naked drawdown exposure has to be considered. That includes drawdown with guarantees, which is designed to offer the potential of capturing market growth.
We already know that the top two priorities people have in retirement are the flexibility to have greater control over their income with the potential to grow their cash, and the security that at least some of their income is guaranteed. Neither drawdown nor annuities provide both of these. Therefore, when making recommendations, advisers should take into consideration first that both these features lead the agenda for a retiree, and then assess whether the peace of mind security brings is worth the cost for their client.
2 Onepoll Research was conducted in July 2015. 2,016 individuals aged over 45 were interviewed for the study