The annuity market must become more innovative and flexible to meet the needs of people's changing perception of retirement from a cliff-edge change to a transitional process, claims industry experts.
Speaking at the National Association of Pension Funds (NAPF) annual conference on “The annuity market in 2050: boomtown or bust?”, Adrian Boulding, pensions strategy director at Legal & General, claims retirement is now “too long to be seen as a single period from a financial planning point of view”.
Instead, he believes there are now three stages to retirement:
- Part-time retirement: A transitional period where people continue to work but part-time or seasonal where their income is lower and more variable;
- Full-time retirement: Security becomes much more important as they need a guaranteed income which will continue for the rest of their lives, and
- Later years/care home needs: Increasing infirmity additional care which can be initially modest but can grow, with one in six people currently ending up in a home.
As a result, Boulding says there should be more flexibility and innovation in the post-retirement market, as one size clearly does not fit all with some wanting flexible income drawdown for the early years, moving to an annuity during full retirement and perhaps some kind of equity release or long term or life insurance to cater for care needs in later life.
He says as the pensions system is still mainly voluntary, despite the proposed reforms, there need to be more attractive retirement options to create a “pull” effect and encourage people to save as there is flexibility in what they can do with their money when they retire.
Kevin Wesbroom, from Hewitt, agrees retirement is no longer a precipice and is more of a transition meaning employers now have the opportunity to not only help their employees accumulate savings but also how best to spend them.
He says as a result organisations are going to have to adapt to the new realities of the annuity market and the changing view of retirement where people work longer but for less hours, and offer suitable flexible employment propositions to cater for this.
Tom Boardman, director of UK policy development at Prudential, suggests the view of and activity in the annuity market "is not normal" at the moment, as the majority of people are choosing products at the extremes of the risk scale.
The large part of post-retirement business, 83%, is centred in annuities, which are a safe low risk investment, while 15% of people choose income drawdown which is quite risky as you are using your actual fund as income. But there is nothing in between.
In "normal" markets, most people go for the middle ground, and Boardman believes this is where the innovation and flexibility of the annuity market is going to be centred.
In 2050 he believes the annuity market will be split into sections where those retiring before 65 will go into drawdown as annuities will be too expensive, those retiring between 65-68 will enter into some kind of annuitisation with more choice over death benefits and value protection.
Meanwhile for those retiring over the age of 68, the normal state pension age by then, there will be a choice of middle ground products which would suit their range of needs.
Boardman suggests by 2050, with-profits annuities, flexible life-time annuities and ‘safer’ more flexible drawdown will be the key product areas for the future retiree, and this is where the annuity market should be focusing in the future.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected].IFAonline
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