The BDM Interview: Martin Lines, Partnership Assurance
Martin Lines, head of business development, Partnership Assurance, spoke to ABR editor Rob Kingsbury about the changes to the pension rules and where annuities fit in the new pensions paradigm
1. Where do annuities fit in the new pensions paradigm?
2. What are the challenges for advisers arising from the new pension rules?
3. Will the new pension rules mean more business for advisers?
4. Will Partnership have a product ready for April?
ABR: Annuities have taken a hit both in terms of inflows and reputation since the pensions rules changes were announced in the 2014 Budget. Where do they fit in the new pensions paradigm?
Martin Lines: There was a lot of rhetoric after the 2014 Budget and it seemed every time annuities were mentioned it was alongside the phrase ‘poor value’. However, the FCA research paper published in December (Occasional Paper 5: The value for money of annuities and other retirement income strategies in the UK), reset the conversation to some extent by talking about annuities as insurance contracts and highlighting that just looking at annuity rates compared to what might be achieved in an investment scenario is far from the full picture. It is easy to undervalue the insurance aspect of an annuity.
Often what was written about was what happens if a person dies early – and comparing the invested portfolio and annuity pictures. But the reality is that most people underestimate their longevity. If there is an average longevity of 83 years that’s only when 50% of people die but what about the other 50%? In a Pensions Policy Institute survey recently it was found that people underestimate significantly how many people would live to age 80 even though they may have an octogenarian in the family.
We rarely hear about the longevity side of the equation yet it is a significant aspect – and this is where the insurance element comes in. The point of pooling annuities together is so that there is an average payment across the piece; this is the whole idea of insurance in the first instance. We don’t know within a particular pool of people what the survivability rate is but the point is that everyone within that pool will have insurance for as long as they live.
But if you look at it in an investment context you get a different view of it. So it comes down to how the question around retirement options is framed – whether you talk about an investment frame or a consumption frame.
For example, if client has a £100,000 account but with Option A they can only draw the interest opposed to Option B where they can draw out whatever they want –Option A (an annuity) does not seem as attractive as Option B (an invested pot). But if you phrase it that Option A guarantees you an income of £5,000 a year for life and Option B won’t and is open to market risk, then the situation changes.
One of the challenges that people will have with the greater freedoms is the change of mindset when moving from their accumulation stage to their decumulation stage. Advisers will need to encourage clients to move from talking about how their investments are doing every year to talking about how much they can sustainably spend while still remaining invested. This isn’t a risk in the accumulation phase but it is an added risk in the decumulation phase. That’s where the framing comes in, in terms of measuring those two different yet significant influences on a person’s retirement years.
Rory Percival, technician specialist for the FCA, was talking just before Christmas about capacity for loss being a measured amount. So not an emotive element but measured in pounds and pence. If you think about an annuity in that context, as an insurance underpin to take care of a person’s basic financial needs in retirement and then whatever is left can be invested, then the reasoning becomes how can we spend less on the insurance so we can spend more on freedom of choice?
Like any other type of insurance the question is not how much money do I want to spend on an annuity but how much cover do I need. The next question is how can I lower the cost of the premium?’ This is where underwriting will come in, looking at all the clients details not so much to increase what they are getting but to reduce the cost so they have more to spend on the freedoms.
This will be our direction of travel, to look at how we target the benefits at that individual at the lowest cost.
What do you see as the challenges for advisers arising from the new pension rules?
Alongside the challenge that people will have with the greater freedoms around moving from the accumulation stage to the decumulation stage, is the fact that longevity isn’t a linear calculation. It is going to have to be reassessed periodically because, from an actuarial perspective, if you look at life expectancy in any given cohort of people, one to three years down the line it’s changed. There’s a recalculation that has to be made. If a person survives to the average life expectancy then what’s their new life expectancy from then on? The longer you survive the longer on average you’re expected to survive. It keeps moving. So if a client is looking to run down their funds, which seems a sensible thing to do, the adviser has continually to reassess the life expectancy assumptions within the cashflow modelling calculations.
At first glance the rules seem quite simple but with any change of this magnitude, when you get behind the scenes, there is a whole raft of issues that need to be addressed and there are some trip wires that advisers will have to advise people through.
The immediate issue for advisers is around people deferring taking their pension until after 6 April. But what happens if the client has a mind to pay contributions in after April but still wants to take some of their benefits? The adviser would be better off giving the advice ahead of April because of the difference between capped drawdown and CAD rates and the implications of the annual allowance. There are pros and cons to what the client does pre or post 6 April. They could wait to do drawdown until post 6 April and find they have a reduced annual allowance, whereas if they’d done it before April, on a capped basis, they’d have wider scope for contributions, if that were the client’s aspiration.
On the tax planning side of things, when people talk about taking cash out of their pension they are talking about uncrystallised funds pension lump sum. The challenge there is whether that is the right method to take the money – it might be but do clients understand that 75% of that sum is taxable even though it is called a ‘lump sum’?
In other words, when is a lump sum not a lump sum? When it’s an income. It is knowing the nuances and how they may affect individual clients and helping clients understand the terminology that on the face of it seems quite simple but is actually quite complex. Clients need clarity around what they’re doing and how they go about it.
What also needs to be addressed is the wider implications and how the new rules will impact other benefits, for example, around Long Term Care and means-tested benefits. Whether people leave their funds in their pensions and have a notional income designated or an actual income designated or whether people have taken money outside of the pension and invest it somewhere else, the question is what’s accessible under long term care and means testing rules?
That could apply across a range of different benefits. It’s those questions that will impact on the advice that is given and it’s in these areas that the industry and consumers need further clarity.
ABR: Will the new pension rules mean more business for advisers?
ML: I think there will be a high demand for financial advice post 6 April. Part of the driver behind freedom of choice is to get people more interested in their pensions, whether from a savings perspective or taking benefits more flexibly, so there is going to be a need for advice around those issues. Is it feasible that people go to the government initiated guidance sessions and realise they need a bit more of an in-depth analysis of what they have? I think the answer is probably yes for a lot of individuals.
One of the outcomes from the proposed Guidance Guarantee is that, rather than with the open market option where people still weren’t doing anything, people will be doing something. If that transitions to them taking regulated financial advice that has got to be good news.
ABR: Will Partnership have a product ready for April?
We will have a product but what shape it will take and exactly when we’ll launch it is under discussion. What we are hearing from advisers is that there is a demand for innovation. That is where the discussion comes in. If the client wants a guarantee pre or post April you could argue there’s a suite of products already out there in the market, called drawdown and annuities.
What’s probably needed is a guarantee combined with an element of flexibility.
But one of the issues being discussed in the market is around products being too complex. Then there’s a danger clients won’t understand what they have. If the idea of freedom of choice is to give people empowerment and clarity over what they’ve got then there’s a balance to be had around innovation and simplicity.
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