Retirement income options that work across the generations
Aegon’s pension director, Steven Cameron, explains why advisers should consider some alternative options for those who want to pass on their unspent retirement money to their surviving loved ones
In the past few months it’s become well documented that the wealthiest portion of the population in the UK are today’s retirees. Generous state benefits and gold plated defined benefit pensions, as well as the growing trend of over 65s continuing on in some form of work in retirement, mean that today’s retirees are some £20 a week better off than their working age counterparts, according to recent research from The Resolution Foundation.
Yet, for the generations expecting to retire in the next 20, 30 or 40 years the picture is set to be very different. The Centre for Policy Studies predicts that Generation-Y could be the first generation in British history to have a lower quality of life than their parents did.
This presents a conundrum for today’s retirees. They’re living longer, there’s increasing pressure on the social care system and a need for greater self-provision, but their children and grandchildren are likely to face a difficult financial future, struggling to get a foothold on the property market and failing to make adequate provision for their retirement. Indeed, the IFS found that younger generations are likely to rely on inheritance for their wealth.
So, while today’s retirees need to ensure that they can meet care costs and any unexpected expenses that retirement may throw at them, they’re also increasingly likely to want to, and need to, financially support their sons, daughters, and grandchildren.
Prior to the 2015 landmark pension reforms, annuities were the go-to retirement income product, be that through lack of suitable alternatives or the security offered, as they provide a guaranteed income for life, something which many people value. However, there are two major downsides with annuities. The first is that money is locked away and there’s no way or accessing a lump sum, and the second is the options for passing benefits to dependents on death were far less flexible or not possible at all.
Since the introduction of pension freedoms, there’s been a shift and drawdown products, those that allow money to be invested in the stock market and accessed as little or as much as people need, have become more popular. Between July and September 2016, 41,000 drawdown policies were entered into compared with just 21,000 annuities4. An added benefit of these drawdown products is that they allow retirees to nominate anyone they want – for example a child, a grandchild and even friends – to potentially receive any lump sum death benefit payable (or where possible, taking drawdown income payments). This benefit can be tax-free if the member dies and is under age 75 and within the two year period, starting on the earliest of either the date the scheme administrator is first notified of the member’s death or the date the scheme administrator could have first reasonably known of the member’s death. If after age 75, the payment will be taxed at the individual beneficiary’s marginal rate of tax.
The value of an investment, and any income from it, can fall as well as rise and isn’t guaranteed. A member could get back less than originally invested. The tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The information is based on our understanding of current, taxation law and HM Revenue and Customs practice, which may change.
Drawdown with guarantees
However, for the retirees who don’t want to sacrifice the security of guaranteed income, but still have the ability to access lump sums of money, as well as pass their money on, there’s another way. A ‘drawdown with guarantees’ provides a solution for those that want to take advantage of the freedoms that the pension reforms afford, including inheritance tax planning, while also securing a guaranteed income for life.
Importantly, it converges the features that both traditional options offer, a guaranteed income for life coupled with the legacy benefits along with potential investment growth and flexibility.
Any guarantees are based on the ability of the issuing insurance company to pay for them. If, for example, that company no longer existed, then the guarantees it provides would be affected
While these emerging products are still finding a place in the retirement income market, a recent report by the lang cat found that drawdown with guarantees, which is designed to offer guaranteed income and the potential of capturing market growth, should at the very least be part of advisers’ conversations with clients and form a greater part of the retirement planning landscape.
Ultimately, retirement income planning comes down to the client and what makes them feel comfortable and happy with the approach they take. If someone entering retirement wants to be secure in the knowledge that they’ll have an income for life, but if they don’t use all their money, it will be passed on to their loved ones, drawdown with guarantees is a good option for them to consider.