Helen Morrissey talks to a panel of experts about the options available to people when they reach retirement
Helen Morrissey: The UK at-retirement market has undergone unprecedented change. We've seen increasing amounts of drawdown and continued evolution of middle market products. Add to this equity release has become an increasingly accepted part of people's retirement planning. At this roundtable we are going to look at the at-retirement marketplace and question how it's developing to meet the needs of its customers.
If we start with the first area of the agenda, which is the annuity market. Annuities remain the most popular retirement product, though there has been increasing criticism labelling them inflexible and poor value for money. Is this a valid point of view and if not, why not?
Stephen Hunt: I think quite simply the reason why annuities are the most commonly used investment vehicle in retirement planning is because of a lack of knowledge within the market. 60% of people with products don't exercise their open market option, there's no debate, there's no consultation, so they default automatically into the annuity. I think there's a significant lack of knowledge within the industry as well on what options are available at retirement. A recent survey concluded that two out of five IFAs had little or no knowledge of invested annuities. Invested annuities have their place. They're not for everyone, but they are, to an extent, a bridge between the guaranteed rate annuity and drawdown.
Helen: What kind of trends are you seeing in the annuity market as a rule? You were saying that there's been a real uplift in impaired and with-profit annuities.
Stephen: It's simple maths. There's two aspects to the conventional guaranteed rate annuity. A large number of our clients are ABC1s, and that's just by accident, not by design, because we're targeting the internet and Google users, so we tend to attract the more educated. They're doing the maths and realising that an annuity is going to give a return of about 2.5% fixed for 25 years. Even if someone was to live to be 90 or 100 years old, you're still only looking at about a 5-6% return on your fund with a conventional level annuity and so they are looking for alternatives. We've seen a massive increase in impaireds. I think that's also to do with the fact that the impaired market has got better and rates have increased due to better underwriting. You can get 20-30% uplift sometimes, which, is a significant benefit.
Ray Chinn: I think coming back to your original question, the reason why a lot of annuities are perceived as poor value is because people don't shop around.
Helen: A lot of people in the industry say to me that people are aware of the open market option they just don't know how to do it.
Bob Perkins: I don't know that people aren't aware of the open market option, there are a lot of issues in the annuity market. Clearly, there's the issue of trust - who do they go to for advice. There's also an issue, I think, over client expectations, because the main reason why people take annuities is pure and simple, they need the income and they don't want the risk. It doesn't matter what we as IFAs and product providers produce for them by way of options, it comes down to me asking them very simple questions. 'You've got this fund of money, it's going to provide you with an income one way or another. What sort of income do you want? What's your attitude to risk? Are you prepared to have an income that can fluctuate year by year where you can't budget and you're never quite sure what you're going to get, but there's prospect for growth and you can get the option to increase your fund and keep control of it? Or do you need a steady income that you can budget for?' There are people who quite rightly want choice but actually Mr Joe Average with his £30,000 pension fund really needs certainty of income. Monetarily I think annuities can be perceived as being poor value for money, but in terms of the job they do I'm not entirely sure I would write them off just yet for the vast majority of people.
Ray: The other side of the risk is how long you're going to live for and the impact of inflation on the value of your income. We worry about today and we don't worry about the future, and we need to redress that balance somehow.
Bob: Within the industry of course we focus on pensions and we look for the most tax-efficient means of accumulating money, but actually people don't save like that. What we've got to start talking about is saving for retirement and, yes, using the tax advantages of pensions, but also saving on a wider basis. Just as you wouldn't put everybody into a UK equity fund, you wouldn't put everybody's money into a pension. Different products do different things at different times of life, and people want different access to money as they go along.
Chris Smeaton: You can't write off annuities here. Annuities are like any other product, there's good ones and there's bad ones. I think there's definitely still a market for annuities for some customers, but for other customers it might not be the right thing.
Stephen: We want people to make informed decisions, that's it, and if the customer knows all the factors and chooses a conventional annuity then that's fine so long as it's an informed decision.
Helen: We were talking a bit about the impact of inflation on someone's retirement income. Are you finding that people are becoming more aware of the issue of inflation on their income over time?
Ray: We've just done some research in the past couple of months and fears of rising utility bills and the cost of food is the number one concern for people approaching retirement. They're worried about rising prices, but they don't exactly know what they can do about it. It's very difficult to look 30 years ahead and say how things are going to be but you can make some choices. For example, with-profits annuities or other solutions can provide more flexibility over future income levels compared to a level annuity.
Stephen: I think the majority of people have got no idea about the impact of pension inflation. We've had a good 10 years of fairly stable inflation and in many areas we've had deflation. If you look at the cost of electrical goods and things like that, they are actually cheaper now than they were 10 years ago. So their concept of the effects of inflation is, I would say, very low.
Simon Little: I'd agree with that, we've done some research recently that concluded that the real cost of inflation for people in retirement is probably nearer to 10% right now. A large amount of that is driven by increased fuel costs, electricity and more recently the monthly food bill. We've talked already about the average fund for annuities being round £30,000. I'm no expert on annuities, but that's pretty horrifying, how can somebody expect to live 20 years on £30,000? We talk about the pension crisis being just around the corner, when the fact is, the pension crisis is here already and unfolding right in front of our very eyes. What we've got to do is start to spread the word about how people manage their finances in retirement. For those people who are 65, 70, it's too late, they've got an immediate need in that they need more income now. What we can do for the next generation is start educating them today so they save more for their retirement.
Lisa Clague: People in their 20s and 30s are more concerned about buying a house first. To get a roof over your head for now rather than get a roof over your head for when you retire. I only bought my first house last year; the average first-time buyer now is something like 34, so you're not going to be saving to put into your retirement at that age.
Bob: Back in the late 1970s of course we went through the similar situation where there was a huge money shortage. The building societies didn't have cash to lend, and interest rates were 15, 16, 17% and more. So today's credit crisis has happened before, these things are cyclical to a degree. Also the thought that people don't want to save because they've got to buy this annuity at the end of the day. I think it's not so much buying the annuity, I think it's the losing control that is the issue for lots of people. They put all this cash into this plan and no matter what it builds to at the end of the day; they actually end up losing control of three-quarters of the fund. It does irk people, and that is the big thing that holds pensions back.
John Moret: I think Bob's right on that. This whole flexibility point that was brought up earlier is absolutely key. What worries me about the guaranteed annuity is the fact that putting people into a guaranteed annuity at 60, may be a very sensible decision today, but you're locked in and if inflation suddenly takes a steep upward trend, that annuity suddenly looks very poor value. I think if we could get some greater flexibility in terms of what's allowed within an annuity that would be extremely helpful.
Helen: Do you find that particularly the case with SIPP clients? With the self-invested pension a lot of people tend to be very engaged with their pension and investment and they're not going to want to sign that involvement away by purchasing an annuity.
John: Absolutely not. Obviously at the moment eventually they have to buy an annuity, but clearly we've seen a huge take up of unsecured income of taking cash and not taking any income at all. I can just see that continuing. I just don't see the government's position on age 75 as being sustainable, and I'm absolutely convinced that will change.
Chris: I think it is about flexibility. It's becoming increasingly popular to actually use a mixture of drawdown and tactical annuity purchases, because annuity rates are relatively good at the moment, and what some of our high net worth customers are doing is mixing phased drawdown and going in and purchasing annuities tactically over a period of time.
Lisa: The average SIPP client, really talking about true SIPPs obviously, is the more sophisticated investor and they're used to having control of their fund. Our average SIPP fund is over a quarter of a million pounds, and they will have significant other investments outside their pension pot as well. They're not used to then just handing it all over to an insurance company at the age of 75, and it's something that a lot of people deeply resent. It's like saying at age 75 you've no longer got your faculties and you've got to hand it over to somebody else who knows better.
Chris: The reluctance to save and the social issues associated with that are a massive concern. What does concern me more is, with equity release we're almost saying, 'Don't bother saving, use your house to take an income', and I think that's potentially a future issue. I'd like to know more about how these equity release schemes work and how you can safeguard from the risks involved.
Simon: I think it's a valid point, but I don't think the industry is saying, 'don't bother saving', what the industry is doing is catering for people's needs today by using an asset class they have accumulated over their lifetime. In this country people have a great lust, if you like, for property. We've certainly seen that over the past 10 years.
What we're seeing is a massive cultural shift in terms of how people look at their asset worth when they reach retirement. To me this is the key issue, and one of the reasons why I guess an equity release provider is sitting round the table at a pension/retirement debate. Most people will retire and they'll have an element in savings, they'll have an element in personal pension, but for most their biggest asset will be their property. In essence what I think we're witnessing is a shift that says, 'Well why shouldn't we just look at that as a bundle of asset classes and see how we get the value out of all those assets to enjoy 25, 30 years of retirement.' I think we're burying our heads in the sand if we think that everybody's going to carry on saving £30 or £50 a month and he's going to have a £150,000 pension pot or more at the time they retire. You have to look at the totality of your assets at retirement and there's no reason why this should not also include your home.
Ray: I agree with Simon, I think some of the challenges which are starting to be addressed in the equity release world are around the difficulty of a property's emotional tie. This is a portfolio of assets, the property is one of those assets and how do we make that portfolio of assets work best?
David: I think it's very easy to get skewed by the people who you deal with. If you're dealing in the SIPP market and everybody's got a quarter of a million pound pension fund plus piles of cash elsewhere, plus a big house and so on, then they're not the people who are likely to end up doing equity release, unless they're really switched on to IHT planning in later years.
However, in terms of equity release as a way of supplementing income, I think it's reality. If the average pension fund is £30,000 then that's not an awful lot. There's no point looking backward and saying, 'Well you should've done more pension planning.' You can't lay that on people, you can't change the past but if they have a house worth say £200-300,000 then equity release should be seen as a likely way forward.
Simon: We are seeing people come to us to release equity to pay off £50-60-70,000 and more of credit card debt. For many equity release is simply a tool of how we continue to manage debt in retirement without the burden of having to repay it. So I think there's some interesting dynamics at play here that are only now just starting to unfold.
Bob: That's a very interesting one, because most people I think if you asked them would love to retire at 55 or 60, but realistically they expect to work beyond 65. The other thing you mentioned there was about repayment of debt, and of course I'm finding that more and more people are going into USP to release tax-free cash to reduce debt as well.
Helen: You were saying that a lot of people are taking the tax-free cash and no income, and then you're also having other people that strip as much income as they can out of the fund because they don't want anything left. How much of those two things are going on and what are the potential issues there do you think?
Lisa: We certainly see an increase in taking tax-free cash and nil income particularly at early ages. Some use it to start up their own businesses. With the increased flexibility now as well it means that they can take tax-free cash and nil income, or maybe take tax-free cash and even some income while they need it to get the business up and running. They can reduce it to zero once the business is bringing them some profits in, and when it starts making money you can still make contributions.
Bob: I'm also finding that people are interested in stripping out - surplus income - and gifting it as well.
Ray; We're seeing around 55% of clients taking tax free cash and no income. They tend to be the younger age profile, so pre-60s typically. Then we're seeing about a third stripping income out of their fund. They tend to be the older ages - approaching 75.
Stephen: I think also drawdown is possibly a bit of a dangerous animal in the wrong hands. We've seen clients of ours persuaded to go into drawdown and were invested 100% in equities in 1999-2000 and their fund halved.
John: It's an interesting point, because the key, for me anyway, with the use of drawdown is the need for most people to have regular ongoing advice. Contrast that with the annuity, which effectively is a one-off decision.
Bob: I agree with John, you can't just go into drawdown and switch off and say, 'Well I'm in drawdown, I can forget it'.
Stephen: Yes, and that is another reason why quite a lot of people do choose the annuity route. When you've worked all your life and you've looked at your investment portfolio all your life sometimes you get to the point when you don't want the hassle any more.
Chris: These are complex products, so good advice is going to be essential to making sure they're not being mis-sold.
Ray: Part of the problem is we make them complex. Drawdown is to me a bit like a bank account. Your monthly salary goes in and you have to make it last the month. The difference with drawdown is you get a big chunk and it has to last a lot longer, but you've got less sight about what's going to happen over that period. It's a simple concept, you've got a certain amount of money and you've got to make it last - better education and more sophisticated modelling tools can help here.
Stephen: The other main aspect that people really like about drawdown is the ability to pass the fund to their spouse or children. Of course with annuities the fund is largely lost on death unless you have certain benefits.
Chris: Almost 50% of our clients choose drawdown for this reason.
Bob: We start talking to people about how phased retirement works; it can be quite a complicated issue in itself. It would be far easier if the government would say, 'Well okay, we don't actually care what you use the fund for'.
Stephen: It's all the rules that do contribute to the cost.
Simon: I'll just throw something else in from the equity release perspective around this drawdown debate, I'd be bold enough to say that actually I can see equity release being the new income drawdown in this market. I think for a lot of people what we've got to realise is the dynamics that have changed in equity release. It's no longer just here to serve the financially needy. The market has changed quite dramatically. The fastest-growing sector is the lifestylers, as we call them. They spend the kids' inheritance because the kids have spent their income, and they want to have a good time in the 25-30 years that they're going to have in retirement. They need to unlock all the assets they've accumulated over their lifetime. You touched on inheritance. Increasingly about 15% of the market is based around inheritance tax mitigation. People are also using equity release to give money to children or grandchildren to enjoy during their lifetime.
Chris: Has equity release still got an image problem?
Simon: To some extent yes and that is one of the biggest challenges that the market faces. But this is actually being eroded quite quickly now.
David: Yes, I'd agree, I think it is gradually getting better. The TV media struggle, but the written media I think have grown up a bit, and realise the problems that it had are about 20 years old now in terms of serious mis-sellings. It is becoming a mainstream product, there's nothing to be frightened of. Chris, you said earlier about equity release having pitfalls - what exactly were you thinking of?
Chris: I just think there is a danger, if we pin our hopes on equity release to provide income in retirement that the savings element is lost altogether.
David: I don't know if that's a big risk. I would agree with you that approach shouldn't be encouraged. I do equity release day in/day out, but I wouldn't be talking to the younger generation and saying, 'Oh don't worry about pensions.'
Bob: A lot of people think like that already. What always makes me smile is when clients say they will downsize at retirement. I tell you now, when you go to look at a smaller house, you're not going to like it, because you're used to a big sitting room, you're used to a big garden.
David: It's also a huge question-mark as to whether downsizing is a better financial choice than equity release.
Helen: Standard Life did research on that. It showed the difference between downsizing from a detached to a semi-detached for instance. People think you're going to get this huge lump sum but spread over 20-30 years, but it really doesn't come to an awful lot at all.
Simon: I just want to re-address your point Chris that it isn't the industry that's saying, 'By the way, don't bother about saving because as long as you own your own property you'll absolutely be fine in retirement.' What the industry is doing, quite responsibly, is now saying, 'Look, this is part of your overall asset worth as you get to retirement. Don't dismiss it. Don't look at it as you've become some kind of social leper because you decide to go and use your property to enjoy your retirement.' I think that the biggest hurdle equity release has got to overcome over the next few years, is making it socially acceptable as a means to funding retirement and doing what somebody wants to do. It's important all of us join up and start to get some interplay here, because why shouldn't equity release actually be used to free up £100,000 so I can put something into a SIPP or drawdown plan?
David: Every single financial adviser dealing with at-retirement advice, if they're not actively involved in equity release themselves, should at least have a relationship with an adviser who does. I think we should all concentrate on doing what we're good at, and if pensions advisers don't want to be doing equity release themselves, then they should at least raise it as an option, if not for immediate use then for three or four years down the line. The common pattern is that people get their tax-free cash, they've got their income and the tax-free cash gradually gets spent on those extras, because obviously their income's dropped, it's used for the extras and maintaining the quality of life. Then they get to 68, 69, 70 and find that they're struggling, not struggling to live, but struggling to maintain the quality of life that they actually want, and therefore equity release is the obvious next step to maintaining that.
Bob: I think you'll find that it's in the discussion, so when you're talking to a client about their retirement prospects equity release is in the mix.
David: Yes, and that's how it should be. What worries me is that there are still some IFAs who are anti-equity release. With the SHIP schemes you've got guarantee of no negative equity, and you've a guarantee of the right to live in the property for the rest of your life, and the right to portability, to move property. So you're not tied to that property for the rest of your days, they can't turf you out, they can't go on to other assets.
Simon: Equity release doesn't mean you can't pass on wealth, it means the amount that you pass on might be reduced in many circumstances. I think that's part of the education.
David: Thank you for saying that. Somebody who takes money out of their property is almost frowned on in some circles, and especially in some parts of the media, as if it's some sort of failure. If somebody's got a pile of cash in their pension fund or a pile of cash in the bank and they choose to dig some of that out and spend it, does anybody frown on them?
Bob: Well arguably, for somebody who is, let's say, 62, 63, there may well be a case for saying: 'Take the money out of your property because your pension fund's in a virtual tax-free environment, so do you really want to be stripping that out now?'
I know plenty of clients that have got portfolios of shares and they'll be the last things they'll want to get rid of. They've had them for years, they're happy with them, it gives them a good income, and actually they'd rather raise money from anywhere else rather than touch those shares. That's not uncommon.
Chris: As an industry, don't you think though we need to be responsible and position equity release as part of a retirement plan toolbox?
Bob: You're absolutely right. We've got to make sure our clients understand that property is part of their investment portfolio, so they don't stick all their money in bricks and mortar, they do get spread.
Ray: This starts well before retirement, it's looking at that property as part of your future pot of money that you're going to need. I think with equity release, one of the problems Simon touched on is there is a feel that it's a distress purchase. The reality is that it shouldn't be viewed this way.
David: There are three levels in terms of the type of purchase. There's the distress purchase, people who need it; there's the lifestyle people who want the home improvements, the new car and so on; and there's the wealthier ones who want to give it away, IHT planning and so on. The middle category is by far the biggest. The distress and the wealthy are small ends of the scale, the vast majority of people are doing equity release because they choose to rather than because they have to.
Ray: But again if you probably look at the amount of equity release business that's being done; it's a small proportion of the overall at-retirement market.
John: Just out of interest, what is the actual size of the equity release market at the moment?
Simon: It's 1.2 billion and it's been at that level for about three or four years now.
David: It is growing, but it doesn't look like it's growing. Whereas previously people would take out a larger amount of money and then park that in the bank and use it gradually, now they're taking out drawdown schemes where they take what they need, so the number of plans has increased, but they're taking smaller amounts to start with, with a view to coming back for more as and when they need it.
Bob: What actually makes me smile a little bit about the potential stigma of equity release is if the government hadn't backtracked on residential property, people would be doing that through their pension fund.
Ray: Culturally we talk about 'my house is my pension', and yet when you get to pension age, 'What? That's my house', 'Hang on, 20 years ago, that was going to be your pension', 'Yeah, not now though'. So it's getting that sort of balance right around. 'Okay, if your house is going to be your pension, let's have that discussion, it could be part of your pension, but it's not going to be the be all and end all and you're not going to feel like downsizing when you get there probably, for the reasons you've discussed. You have to look at it more holistically'.
Bob: I do lots and lots of seminars for people who have issues about how do they save for retirement, how are they going to plan, what are they going to do when they get to retirement? I always draw an analogy with gardening. When you plant out your garden you don't plant out your garden so that everything comes up in June and dies. When you're saving for retirement there will be points in your life when you're going to need money at certain times and you're not going to have everything in your pension fund, because that will do a job. You're not going to have everything in your property, because that will do a job, but you'll have some in your pensions, some in ISAs and some in cash. That's the way we've got to educate people.
Helen: If we just move on to the next point on the agenda which is the Third Way products. A lot of people have spoken about them, because they seem to ideally fit that middle ground between annuities and drawdown, in that you get the opportunity to benefit from investment gains, yet you also have guarantees. However, they haven't made a massive impact on the market and it would be interesting to see how you see them developing.
Ray: I think the biggest challenge is nobody quite gets it yet, we've done some IFA research and nobody quite understands what's going on underneath the bonnet. Education, coupled with greater transparency and simplicity will increase the likelihood of this area of the market really taking off in the way anticipated.
Bob: One of the things that I find with Third Way products is they're all different, there isn't any standardisation. If you had some uniformity then you could look at these things in a different way. For me with the Third Way products, my issue is where do they leave the client? Do they leave the client with the investment risk, with the annuity risk, with both? Ideally what you want is a product that doesn't leave the client exposed at the end of the day to the annuity market and you don't want a product that leaves them wholly exposed to investment risk. So you need something that covers, if you like, both ends, and not all the products do. They are also hugely complicated.
They almost fulfil the same sort of thing as a with-profit annuity with a floor, do you know what I mean?
John: They ought to be just that, they ought to be clearer and more transparent.
Ray: It's back to the customer need. I think a with-profits annuity with value protection could take a big chunk of customer need out of that Third Way market. Maybe we haven't been that effective in marketing that as a concept.
Chris: The question is how can we justify the additional cost associated with these products when on the face of it seems like flexible drawdown and annuity purchase could do the same job at a fraction of the cost.
Ray: A couple of UK companies have said they're going to come into the market so I would be interested to see what they come up with. My belief is demystify and simplify, and transparency is where that market will grow and win and actually using some of the things that we've got today perhaps in a slightly more effective way, rather than building in all sorts of opaque guarantees. Fidelity did some work which they shared with us, looking at guarantees and the cost of the guarantees, it's not just the cost, it's the likelihood of them actually being called into play. At the moment, it's an immature market with lots of innovation, but I think over time hopefully what you'll end up with is some simpler packaged products which are easier for everyone to understand, compare and evaluate.
Helen: Can you see advisers revisiting products like with-profits annuities to see if they can do the same thing?
Ray: Innovation for innovation's sake is dangerous. I think if we can cut through the noise that's going round the market and the confusion this causes and get back to something a little bit more sensible, then we have a chance of again getting more people interested in at-retirement options. Some of the A-Day changes were great, because they did simplify some areas and got more people interested in pensions - we now risk turning people off again by over engineering solutions.
Bob: The thing that frightens me on some of these products is who are the counterparties? Who's providing the guarantees? Who's providing the safety-net? If they're large overseas banks that are already overcommitted to the sub-prime market, then I start to worry a little bit about it.
Helen: Flexibility is a theme that has run through this roundtable. I remember going to a roundtable a while ago on at-retirement options and one of the providers actually said 'Well what is the Holy Grail? What kind of product are we looking for', The response was that it wasn't a new product that was needed it was the removal of the age 75 rule.
John: Certainly in the world of pensions that would be a huge shift, and certainly for the SIPP clients it would be a massive change. Whether moving age 75 or removing it would actually impact on Joe Public I'm not so sure. I think the real thing, and the discussion's been really fascinating, is this holistic approach. Pensions is one very significant part of the market, but it's not the only one. There's clearly a place for equity release and the area that we haven't really touched on is the whole long-term care market. There's probably £400 billion locked up in individual pension plans at the moment in the accumulation phase. All of that is going to convert into some form of income at some point. That is just huge and it's going to get bigger as we get more movement out of defined benefit plans into individual plans. I think it's just an enormous opportunity.
Lisa: You were talking about the removal of age 75, but I think obviously it would take time to have an effect, but it could only be a positive thing. You can probably try to encourage people to save for retirement and if you're using a pension vehicle to do that, it's the fact that people still think 'But I've got to buy an annuity at the end of it' and you lose control' If you remove that necessity it will encourage more people to save, because they can have that flexibility later on in life. We've developed a new product which offers the scheme pension post-75, so with us you don't have to buy annuity at age 75 now. Obviously you've got ASP out there as well, which, when we first heard about it sounded fantastic, and then they did a big u-turn on it. We still do believe there is a market for ASP, especially if you've got clients who don't want to strip out all the fund, particularly if you've got clients who've got a younger wife, in good health, spouse's pension, it can help them leave more benefits in that situation. With the scheme pension, it's product innovation, it's a completely different way of going about it than the Third Way providers. It isn't a guaranteed product, we're not an insurance company, so your person with the average £30,000 pension pot, it isn't going to be for them, it is going to be more the high net worth clients that, as a SIPP provider, we're more used to dealing with. But it does give real alternatives to people who don't want to buy an annuity at 75 or as an alternative to an impaired life annuity, because you can get more out under a scheme pension. It also has the advantage of being more flexible than an annuity, your income isn't fixed for life on it, it's set by the actuary, and the big difference is the fact it's dependent on the member's health status.
Bob: Actually that's a very interesting point, because how does the actuary make that decision? Because I believe that it's a self-certification?
Lisa: Yes, on the health status, yes. Obviously the client has to be aware of the risks, has to be telling the truth and aware of the consequences if they don't.
Bob: Yes, but normally what I would expect to see is an underwriting questionnaire. It will go to the chief medical officer, the chief medical officer would assess the life, he would then tell the actuary what he thought the life expectancy was, the actuary would then crunch the numbers. Where you don't have medical underwriting, where does that leave the scheme pension then in terms of attack from, shall we say, the powers that be at some stage?
Lisa: We've built in a three-year review, so that every three years that health is re-assessed and the actuary does the calculation again. As long as you're telling the truth on that form, which obviously the client has to sign to say that they are and accept the risks and consequences if they don't, your fund will not run out, because the actuary will not let it run out. Obviously the advantage of it is most clients, unless you get hit by a bus, their health will deteriorate over their lifetime before they die, and you can tailor it, and if your health fails, you can increase the level of income you take out your pension. It is really designed about making use of the whole of your pension fund to provide you with an income in retirement and leaving as little as possible left to be passed on.
John: Do you think there's any risk that if this were to be taken up on a large scale by other providers that the government would step in and say 'Actually that's not why we put scheme pension in the legislation'?
Lisa: You can never quite second-guess what the government will turn round and do. What I will say is it's all in primary legislation.
Bob: I agree with you, I don't think it's against what's in the legislation but the bit that concerns me is the underwriting issue, because it's almost like discounted gift schemes, isn't it? If you haven't got an agreed basis then you're always open to somebody coming along or the Revenue coming along and attacking it.
Lisa: It does meet the government's objective, far more than ASP ever did. The reason you get your tax relief on pension contributions is so that it provides an income for you in retirement, and it does that. It's designed so it doesn't run out; it just means you can use more of the pot.
Bob: I see it as a very good alternative, provided it's not clobbered, for people who are on the cusp of going into ASP. As you get older your health deteriorates, and if you have got a big fund and you've got nobody to leave it to you can step up the rate at which you can take the money out.
Lisa: Obviously I can't give you a guarantee that the government aren't going to change their mind but it meets their objective, they still get the income tax out of it, so they're not losing out. The only people that are losing out are the insurance companies, who don't get the annuity purchase.
Simon: Isn't this where we need the ABI to show their teeth and start battling on behalf of the industry and start to ensure that it can have at least a good debate with the government if they were to change their minds on this.
Helen: We're all saying that they need to look at-retirement in a more holistic way. How can we encourage this?
John: I think some of what we've talked about is helpful, but in a way it has to stem from government and regulators, because at the moment we're operating within a set of rules which aren't particularly conducive to this holistic approach. I think the complexity of the Third Way products are an example of where perhaps the industry hasn't got it right, but it is, in the UK anyway, relatively early days, so one would hope that as new products come on the market that that might be overcome.
Lisa: Yes, I think it's a big challenge out there for anyone advising in the market to keep abreast of everything that's happening. We do need to see more experts in this area. With the number of clients that you have to look after and the numbers don't stack up, the number of people qualified to give the advice and the number of people needing it. Whether using more specialist companies, is a more practical way of doing it, because for every IFA in the country to have the knowledge on all products available and keep abreast of everything that's being innovated, it's just unrealistic.
Stephen: I think it's a case of education and I think there does have to be a degree of enforcement by the government or the regulators. If we don't do anything then this 60% of people that do nothing will continue. So it's a case of trying to get people to be aware that that pension fund is actually their money and they should take more of an interest in it.
Ray: I actually wrote down here 'education, education, education', I think education about investment risk, which I think we're getting better at. Education on longevity risk is also critical and the final one, this holistic view which we've talked about a lot. It's not 'my house is my pension' or 'I've got a pension fund', it's about how you draw these things together and make them work for you over the long term.
Simon: I'd like to just twist it round a bit and say I think this is a fantastic opportunity. I think the IFAs are the people who are going to have to get hold of this, grapple with it and make it happen. Government can help, but I think it's for our industry to actually deal with this. Holistic. What does that really mean? It means opening up the choices and giving vision to our customers. I have absolute faith in the IFA community in this country to enable them to do just that.
Bob: There's a couple of things that came out there. I think that to some extent some of this can be done online. However, whether we're talking about use of the internet or whether we're talking about generic advice, there comes a point when the individual says What if I ... and at that point you need face to face. You can build models and you can give clients access to things but there will come a point in time when that interviewee will need advice. So I think the advisers do have a huge job and they can exert a huge influence on what people do in the marketplace.
Chris: It all comes down to quality advice. I think there's an awful lot of it out there in the UK, but I think there's an awful lot that needs to be improved. The government and the Revenue have to put the right structures in place to encourage that quality of advice. All the products we've discussed today have their places, you've got to look at individual client circumstances to make the right decision, but it's giving all the information to the adviser to allow them to make the correct decision that's the difficult thing.
David: Well I've just jotted down we need quality specialist IFAs using quality IT. I think using quality tools to analyse and compare and present those options is of paramount importance. I agree with what's been said about enforcement. I think companies need a rocket up them to make sure they do the right thing in terms of compliance and morals but I don't think we'll ever get over inertia of some people just to do the simple thing. That inertia is very difficult to get over, and that's why so many annuities are bought without looking and that's why so many other financial products are just bought out of laziness. So I don't think we'll ever get over that, but we can try.
These are the views of the participants in the at-retirement round table, and these views are not necessarily the view of the companies they represent. The views expressed do not constitute investment or any other form of advice.
Stephen Hunt is managing director of Rockingham Independent
Most of Stephen's career has been as a technical expert on pension and retirement income issues. He identified a need for the public to have access to retirement income information so they can make informed decisions about their retirement. So in 2004 Stephen set up Rockingham Retirement's web site www.Annuity-Advisor.co.uk. Rockingham, over the last four years has now placed over £100 million in funds.
Bob Perkins is technical manager at Origen Financial Services
Bob has been working in the financial services industry for almost 37 years and dealt with clients of all financial shapes and sizes. He worked for around 2/3rd of that time for a UK product provider and the rest for companies that eventually became part of Origen. His role within Origen is technical manager and he provides technical support to Origen's consultants across the UK. He specialises in pensions, tax planning, trusts and personal investments.
David Wright is managing director of Sixty Plus
David has worked in financial services for nearly 20 years and, after spending his formative years working for a major building society, established his own firm in 1995. Following a decade as a general practitioner IFA he decided to specialise in equity release having seen a steady increase in demand for advice.
Sixty Plus has made good progress in working with a growing number of IFA firms who don't want to advise on equity release but instead refer to a specialist.
Ray Chinn is head of pensions at LV=.
Ray has worked in the industry for over 20 years in a variety of marketing, strategy and product development roles focusing primarily on the at/post retirement market. In his current role, Ray focuses on the decumulation (USP, ASP, phased retirement) products offered by LV= and has responsibility for the investment propositions and partnerships that underpin these products.
The LV= Flexible Retirement Solutions business, part of the LV= group, launched in January 2008 and offers a range of capital and income retirement planning products. Our products and solutions offer a brighter future for those who are planning, or already in, retirement. LV= serves more than 2.5 million customers and members, and manages around £8 billion on their behalf.
Lisa Clague is senior trustee consultant at Hornbuckle Mitchell.
Lisa Clague is an economics graduate who joined Hornbuckle Mitchell in March 2005 with four years sales experience. Her previous position was as technical support officer for Charterhouse Group International in the Isle of Man.
Lisa is senior trustee consultant for the North of England and North Wales. She is responsible for developing business relationships and providing technical support to financial advisers on SIPP and SSAS.
About Hornbuckle Mitchell
Hornbuckle Mitchell has specialised in self invested pensions for 25 years. It has one simple rule: if HMRC allow it, so does Hornbuckle Mitchell. This unsurpassed flexibility has delivered market leading growth rates in the last few years and strengthened its position as the SIPP & SSAS specialist. Following a strong history of innovation, Hornbuckle Mitchell has recently launched its unique income drawdown product, FIPP (Flexible Income Pension Plan). FIPP offers a broad range of options including income drawdown, ASP, annuity purchase and, for the first time, scheme pension.
Simon Little is the business development director of Home & Capital Trust Group Ltd and managing director of Home & Capital Trustee Ltd, the group's product business.
Simon's key responsibilities for the group are to maintain and grow its range of products, primarily their home reversion plans, as well as lead the group's marketing and IFA development strategies. He has been involved in the equity release market for the past five years during which time he has served as a director of Safe Home Income Plans (SHIP).
About Home & Capital
Home & Capital is one of the longest established names in the equity release sector. Since the group was founded 30 years ago, it has become a leading provider of home reversion plans and was a founder member of SHIP (Safe Home Income Plans). The group offers most types of equity release schemes to homeowners, acting either as a specialist adviser or as a product provider.
John Moret is director of sales and marketing for Suffolk Life.
John is often referred to as Mr SIPP having spent much of his working life since 1990 promoting the advantages of SIPP. He was the inaugural chairman of the SIPP Providers Group, now known as AMPS and has worked closely with Government and regulators on a range of issues.
About Suffolk Life
Suffolk Life is one of the UK's leading providers and administrators of self-invested personal pensions (SIPPs), having established over 10,000 SIPPs with gross assets of around £3 billion. The innovative, Suffolk Life Master SIPP offers genuine self-investment of protected rights and exceptional investment flexibility for non-protected rights as part of the same scheme. With the protected rights market estimated at up to £100 billion, Suffolk Life sees this as the next big opportunity for SIPPs.
Chris Smeaton is propositions and e-commerce manager at James Hay.
With over 11 years experience in the SIPP & wrap market, Chris is responsible for Propositions & eCommerce at James Hay. Chris has launched a range of products and services to the IFA market over the last five years, including the award-winning James Hay Online website in 2003, and in 2004 launched the first Wrap to have full FSA approval in the UK.
About James Hay
James Hay's reputation for excellence is based on its proven ability, over more than 25 years, to meet the service needs and expectations of financial advisers. SIPP and wrap funds under administration are £11.4 billion. As part of Santander Private Banking UK, James Hay is member of the Abbey Group and the international family of Grupo Santander, the world's eighth largest bank.
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