Retirement market: Four predictions for the next four years
Partnership CEO Steve Groves makes four predictions for the retirement market over the next four years
Speaking at the recent IFP annual conference Steve Groves, chief executive of Partnership, offered up a number of predictions for how he saw the market changing over the next four years.
Groves predicted there will be broadly three classes of new products, which will see a range of variants enter the market over time.
The early products will be hybrids of annuity and drawdown, he said. “I like these products for a couple of reasons: First you can save on costs by having everything in one place. Second, there is wrinkle where you can put the annuity in a SIPP, which gives you a big plus in terms of flexibility and tax planning, because the annuity income can be paid into drawdown and if the client ever decides they don’t want to take the income it can be left in the drawdown tax free. So I think you’ll see that develop as a theme over the coming years.”
The second class of product he envisages will grow their presence is investment funds with guarantees. He said: “It’s always been an area that’s been interesting in the UK but they are very expensive at the moment. But I think we will see more competition and more product launches and that innovation will put pressure on price and at some time they will get to a price when they may well make some sense for some clients.”
The third class is variable annuities. “These will continue to take a space but they will remain quite niche. They are popular in the States because they have tax advantages that they don’t have here in the UK. So I don’t see them as UK mass market products,” he said.
Groves made the disturbing prediction that there is going to be a mis-buying scandal. – rather than mis-selling. He said: “I don’t think it will be advised clients it will be consumers who don’t take advice and who buy something they don’t understand and that will lead to problems.”
Another prediction around distribution, he made was the reappearance of direct sales. “I think one of the reactions of insurance companies will be to start to look at direct sales again and to try to control that customer relationship from before retirement through retirement.”
And finally, Groves said he believed that the FCA review of the pensions and advice markets will lead to “robo-guidance”. He said: “I don’t see it as advice but a form of guidance. I think the FCA will let that happen in the coming years.”
3. Pensions Freedoms
Pensions Freedoms will be reduced, Groves believes. “I think that as the impact of the pension freedoms are revealed we will see them rolled back, either by policy or regulation.
“And I don’t think TEE* will happen. I’m going to predict a lower flat rate tax relief [for pensions], possibly with a top up for the lower paid and possibly with an end to the lifetime limit.
4. Consumer outcomes
Good news for the advised market, Groves said, was that it was likely that adviser clients will be net beneficiaries of the changes taking place. “We’ll see more flexibility on drawdown, there will be new product innovation giving slightly more flexibility with what you can do with products and overall, as long as advisers do their jobs well, their clients will be slightly better off,” he said.
On the other hand, he continued, he felt clients without IFAs were going to be a lot worse off, because of the complexity that the freedoms have introduced. “The concept of pensions freedoms is great but people have to have the knowledge to be able to understand how to use those freedoms. If you talked about the impact of life expectancy with the man in the street, by and large they would look at you blankly. But they need to understand these things to make these changes work for their benefit.”
He added: “Guidance take up is very low and I think it is going to remain very low. I predicted before the implementation of Pension Wise that I thought take up would be around 5% and never exceed 20% and from the figures we’ve seen I think it’s running well below 5%.
“Interestingly, those using the telephone service have had an average pot of between £100,000-£200,000, which suggests to me they are advised clients calling for a second opinion.
“For people without IFAs I suspect emotions will dominate [as to how they save and spend their money] and I see this group as significantly worse off over the period.”
Time for action
With a level of trouble brewing in the non-advised market Groves said it was time for the regulator and the industry to act and make solutions available to far more people.
“There are big and complex decisions to make and it is quite frustrating that 18 months after [the pension rules] changes were announced we are still navel gazing for solutions to the fact that most people don’t take advice, they don’t take guidance and they probably don’t understand the implications of the decisions they are making.
“It’s more frustrating that this was a problem apparent at the time of RDR. It’s time to act and make solutions available to far more people.”
He added: “A clear message that we would want to send to the FCA is that there is an advice gap and regulation, or perceived regulation, is seriously inhibiting the ability of the industry to innovate and that is happening to the detriment of customers.
“It’s now time for the FCA and the industry to step up to the plate together and to design a system that will work better. The advised market works well for people who can pay for it but we need to find a system that works for everybody.”
* TEE = Tax on way into pension; Exempt during pension accumulation (dividends aside); Exempt on income withdrawal.