Retirement Planner recently staged its first event, the retirement planning e-symposium. Helen Morrissey writes about the issues discussed during the day
In October Retirement Planner kicked off its events timetable with the first ever retirement planning e-symposium. Aimed at the time pressured adviser, the e-symposium enabled delegates to log in and listen to presentations from the comfort of their own desks.
The programme was packed out with presentations from well-known industry figures covering topics from across the retirement planning spectrum. Delegates were encouraged to engage with the speakers by submitting their own questions via email.
The morning began with the key note address from Nick Cann, chief executive of the Institute of Financial Planning. He asked the delegates to consider some of the key issues currently faced by advisers in the retirement planning space and urged advisers to concentrate on building more long term relationships with their clients.
"The over 50s currently account for 34% of the UK population which means there is a large market for retirement products and services. This generation has accumulated significant wealth which they will need to manage throughout their lives and this is a real opportunity for advisers going forward," he said. "Retirement is a gradual process and people's needs change as they go through it. People start needing accumulation products and this goes right through to inheritance tax mitigation and long term care planning."
However, Cann also pointed out that this process will not be without its challenges saying that many over 50s remain reluctant to take financial advice.
"There is a strong degree of scepticism among many people about financial services while others simply don't want to be seen as old," he said. "Advisers need to make sure their clients know that they can really help them to enjoy their retirement years. It is down to the adviser to communicate effectively with their clients and build trust."
Cann then went on to highlight what he saw as some of the main opportunities that advisers should look to take advantage of over the coming years. While A-Day may have happened almost two years ago he argued that it has thrown up issues that the adviser still needs to discuss with their clients such as the annual allowance. In addition he also highlighted the advent of personal accounts and investment in protected rights as other areas where the adviser can really add value to their clients over the long term.
Self Invested Personal Pensions
The second slot of the day was taken up by John Moret, sales and marketing director at Suffolk Life. He highlighted the phenomenal success the market has enjoyed and said that that the market continues to have real growth prospects going forward.
"There aren't any industry figures as to the size of the current SIPP market but the best estimate I can come up with is that there's more than 250,000 SIPPs holding assets worth £35-40bn," he said.
Moret then went on to discuss how the market can expect to become increasingly segmented over the coming years with the market separating into three broad slices - the low cost execution only SIPP, the hybrid or deferred model and the bespoke SIPP.
"The SIPP market is probably the healthiest growing sector in the UK life and pensions industry as there is consistent growth across all three sections. It's a competitive and fast growing market," he said.
However, he was quick to point out that the SIPP market has also faced its fair share of challenges over the past two years with both HMRC and FSA regulation.
"We've seen big changes since A-Day with increases both in the number of contributions being made but also their size," he said.
However, he warned that there was possible change ahead for the industry as it gets to grips with recent FSA regulation. According to Moret there are too many providers currently operating in the market.
"There's a real glut of providers in the market and it's unsustainable going forward," he said. "The industry has also been FSA regulated since April this year and its impact must not be underestimated. There are still areas of uncertainty with regards to reconciliation and we need further clarification. Additional capital requirements are also putting margins under pressure so over time I would expect to see consolidation between providers particularly at the bespoke end as I think there are too many providers in this space."
Despite the already massive growth in the market Moret believes there is still room for plenty more. While the current market stands at some £40bn Moret said he believes it could grow to around £500bn over the next 10 years. However, in order to do this customer awareness of the value of SIPPs needs to be raised still further. Moret referred to CoreData research which suggests that despite increased media presence less than half of the UK mass affluent population have even heard of SIPPs and of those who know about them only one in five actually have one.
"This presents a great opportunity for the adviser as these people will want to have advice from an IFA," he said. "Obviously there will be an ongoing need to review those clients who have legacy products and it's a great opportunity for advisers to take advantage of the case for consolidation of client assets as it will aid transparency."
However, if the industry is to continue to grow Moret concluded that the quality of service the client receives from their adviser will remain all important.
Partnership's head of equity release Roger Hillier was next on the agenda and chose to talk about the issues advisers need to bear in mind when recommending equity release products. Focusing on Mortgage Conduct of Business rules (MCOB) he said that advisers already have a good grounding in how to progress with equity release queries.
"The FSA rules are very clear on the aspects advisers need to take into account when selling equity release -the customer's health and life expectancy," he said. "Many customers will suffer from conditions that could shorten their life expectancy and so they could qualify for more money than average. If we look at the evidence and draw experience from the impaired annuity market then in our experience 40% of retirees suffer from a condition that could enable them to benefit from a higher income. However, as things stand less than 10% of retirees currently have an impaired life annuity."
Hillier continued to explain that a shorter life expectancy can result in more than 15% worth of additional benefit to the client and in some cases considerably more. He urged advisers to keep MCOB rules in mind at all times when advising on equity release.
"We really need to instil a robust advice process and document it in the client's file," he said. "You need to have an appropriate question to be included in the initial fact find document - it could be something like 'Have you ever suffered from any health consideration - yes or no?' It can be quite a sensitive issue so the adviser needs to follow up the question with a supporting note such as 'Please note that some product providers offer enhanced benefits to people with shorter than usual life expectancies.'
He qualified this statement when questioned by the delegates by saying that the client would not be expected to go into any great detail as to the nature of the condition until a later point in the application process.
Rising house prices in recent years means that people are increasingly becoming liable for inheritance tax (IHT). While many people try to mitigate this liability by holding assets in a trust for seven years there are other options available said Judith McKenzie, fund manager at Electra Quoted Management. While some clients use the AIM market to mitigate IHT it's worth remembering that smaller companies can be slightly higher risk. The key question here is how can clients manage to both minimise their risk and inheritance tax liability?
McKenzie took the opportunity to talk about Electra Quoted's latest product - the Acuity Protect which enables investors to retain full control of their portfolio so they can liquidate their assets when they need to should their circumstances change. There are bi-annual portfolio reviews and the client can have insurance options to cover downside protection from day one if they wish.
According to McKenzie the product is aimed at the "risk averse individual who wants a bit of upside potential but needs cover to protect against downside risk."
The key to success according to McKenzie is proper due diligence of AIM stocks. "We take a fundamental value approach analysing cash flow and backing quality management teams," she said. "We meet management at least three or four times and really do our due diligence on each investment - it's crucial that we do this."
This level of detail is what differentiates Electra Quoted's product from the rest of the market said McKenzie; "My concern is that a lot of inheritance tax services only invest in safe stocks," she said. "There are a number of stocks favoured by inheritance tax specialists however their prices do then tend to go up and what happens if these stocks then fall from grace?"
Annuities and TCF
Neil McCarthy, sales and marketing director at Partnership used his presentation to talk about how treating customers fairly (TCF) legislation affects annuity providers and intermediaries. While the annuity market was £9bn in 2006 this is expected to swell to £11bn in 2008. Under TCF regulations advisers are required to assess client's needs and ensure the annuity they purchase is the best one for them.
"One of the biggest issues to be taken into consideration when choosing an annuity is the person's health," he said. "Many people can get more by purchasing an impaired annuity though the decision making process is still quite complex and needs to be simplified."
According to McCarthy providers need to follow good practice and can make things easier by standardising transfer procedures to make the process easier. However, he also pointed out that many companies are working together in partnership arrangements to enable these processes to move more smoothly though he admitted complicated documentation can often put people off trying to get the best deal available.
"People do know that they can shop around but they need to be more conversant with the options available to them," he said. "However, there is evidence to suggest that people are asking the right questions and that they will typically go to advisers for this information as well as family and friends. People do want to know what their options are."
Moving on to the ongoing open market option review McCarthy said he believed that all of the progress being made was positive and would have a real effect on the market going forward.
"The FSA will be reviewing how effective the open market option is and the Treasury is taking responsibility for it too. As the at-retirement market continues to grow people will become more aware of the opportunity to increase their income and choose the annuity that suits them best."
While annuities continue to form the bulk of the at-retirement market, income drawdown is also continuing to grow at a steady pace. Billy Burrows, managing director of William Burrows Annuities gave a presentation on the prospects for income drawdown going forward.
"The most important thing with drawdown is to get the investment strategy right," he said. "While drawdown is still very much geared towards high net worth clients I do take a lot of enquiries from people with less. The most important thing to consider is whether drawdown is right for their circumstances and the size of the pension fund isn't everything."
Increased investment and income flexibility have been highlighted as key reasons why people are choosing drawdown options.
"People sometimes have a need for more or less income depending on their circumstances," he said. "Since A-Day a lot of people take zero income from their pensions. The investment control is where income drawdown really differentiates itself and at the end of the day the success or failure of drawdown depends on the investment strategy. (....) If markets fall then people can lose a lot of money in drawdown."
Burrows then went on to talk about the guaranteed drawdown products that have recently come on to the market which seem to form a middle ground between annuities and drawdown by offering a guaranteed income for life regardless of investment returns.
The result is according to Burrows that "investors benefit from guaranteed income for life without annuitising which allows people to have the best of both worlds." However, he is quick to point out that these guarantees do come at a cost.
"The various insurance companies dynamically hedge their position every month so there is no free lunch as you will have to pay additional annual management charges for this."
The way forward is for the adviser to weigh up the choices with their client to see which option is best. However, the outlook for third way products does look bright.
"If you listen to what middle Britain wants they don't like putting their money into an annuity but also don't like the risks associated with drawdown," he said.
Third way products
The third way theme was continued in the next presentation as Kim Lerche-Thomsen, CEO of Living Time talked about their growth prospects.
"There has been a quiet revolution taking place in the retirement income market and it's brought an alternative for those who would have otherwise bought a lifetime annuity," he said. "However, it's worth asking why this change was necessary."
According to Lerche-Thomsen the latest forecasts show that a 65 year old retiring now can expect to spend 20 years in retirement. As a result any retirement fund built up will need to last longer than ever before to service changing needs. How can lifetime annuities do this?
"Retirement is no longer a one-off event as many people will work part time. You can draw a pension and continue to work," he said. "Consumers need more choice. The market is polarised between low and high risk products with no middle market in between. There is an opportunity to reinvent this space for those who are in lifetime annuities because income drawdown is not a good option for them."
The effect of inflation on a retirement income pot was another issue affecting the lifetime annuitant as it can significantly erode the purchasing power of a pension fund over time.
"People need to be able to revise decisions as needs change - your health might deteriorate for instance," he said.
The open market option (OMO) was highlighted as the catalyst for change with Lerche-Thomsen saying that it should stand for offer more options and enable people to defer annuitisation until the client has more of an idea of their circumstances.
Third way products offer this flexibility and can be split into two main types - the short term annuity and the flexible annuity.
Fixed term annuities can be bought in terms of five years or more. They are simple products which allow clients to defer buying a lifetime annuity until a more suitable time. Income and death benefits are fixed in advance and there is a guaranteed maturity amount. They share three features with lifetime annuities with no investment or income risk and no explicit charges.
Variable annuities are very different to fixed term annuities. While they do protect funds against downturns in the market this level of protection does cost money and careful thought needs to be given before deciding if it is the right product for the client.
The likely impact of these products could be huge as it means that lifetime annuities will no longer be considered in isolation.
"People will not take lifetime annuities in the early stages of their retirement so the number of lifetime annuities will shrink and annuitants will get older," he said. "For the first time we have the opportunity for the majority rather than the few to really manage their retirement funds and move towards more flexible products."
Separately Managed Accounts
The final presentation of the day came from Praemium sales director John Martin who took the opportunity to talk about its Separately Managed Account (SMA) proposition.
Rather than buying funds, Praemium's discretionary SMA is unique in that it buys the fund manager's intellectual property ie. their ability to select stocks and create investment models - and then applies it to the client's account. This enables the client to utilise different fund managers' models and blend them together in a discretionary account. Praemium's SMA can be personalised to the client's taste. For instance if they did not want to invest in tobacco stocks then these could be excluded. According to Martin the product enables real cost savings to be made as unit administration costs are removed.
"Everyone is seeing the same information so there is only one layer of cost," he said. "There are also net trades between accounts and so the model is efficient. People tend to have pensions, ISAs etc and the client may want to consolidate everything to get a full valuation and you can do this with this product. You can also use the product's reporting capabilities to streamline service further."
Praemium is also working on a unit trust version of the SMA which will, when launched, offer many of the benefits of both AUTs and the SMA.
What happens if you missed our e-symposium or want to listen to the presentations again?
Don't worry if you missed the event as you will still be able to log in and view the archived presentations online. Signing up is easy, just go to www.retirementplanner.e-symposium.com and follow the directions and you'll be able to listen to all of the presentations straight away. If you have already signed up to the e-symposium simply revisit the site and key in your user ID and password.
Retirement planning e-symposium: the speakers
Nick Cann, chief executive of the Institute of Financial Planning
John Moret, sales and marketing director at Suffolk Life
Roger Hillier, head of equity release at Partnership
Judith McKenzie, fund manager at Electra Quoted Management
Neil McCarthy, sales and marketing director at Partnership
Billy Burrows, managing director of William Burrows Annuities
Kim Lerche-Thomsen, CEO of Living Time
John Martin, sales director at Praemium.
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