Increasing longevity has changed how people view their retirement. Paul Ayres discusses how advice and products need to develop to adapt to this changing situation
The 'retirement' and annuities market is undergoing considerable change. This has been driven by issues such as, A-Day and TCF legislation, changing mortality and increased competition.
Helping the individual make choices in their maturing years requires a very different set of advice tools than those historically focused on asset accumulation and protection. The financial advice process and the product offerings need to change and adapt to a fundamentally different set of social and financial needs if this is to happen.
The latest Vertex 'White Paper' research challenges the normal concept of 'retirement' and examines new approaches to meet the needs of the growing over-50s population. Through quantitative and qualitative research with some of the country's leading retirement service providers, the results provide a valuable insight into the concerns faced by both providers and distributors in the changing marketplace.
From the distributor viewpoint, the research revealed a clear majority (88%) in favour of re-assessing the advisory process - with financial advisers having to change the way they assess their customers' ongoing retirement requirements. This could be a regulatory-led or a distributor-led change but clearly one which warrants more investigation with all parties playing an equal role in the debate.
71% of providers agreed that customers will need to have the freedom to make decisions at different age points through the retirement process - rather than having to commit to regulatory or product-based 'hurdles' which can constrain them. 88% agreed that customers' needs are very different at retirement age now than previously and that financial planning will inevitably have to become more cyclical through the process of retiring rather than as a one-off advisory process.
One of the most important conclusions from the research was that changes to the UK's demographic profile, social attitudes and attitude to risk have fundamentally redefined the concept of "retirement". This redefinition in turn has transformed the needs of the growing over-50s population. A "one and done" decision to convert accumulated assets into a guaranteed annuity is, for most customers, no longer valid. To provide a genuine response to customer needs requires innovation in product design, the advice regime and tax rules.
Reaching the point of retirement is a major personal and financial event for most people, and the decisions made at, and during, retirement need to be the right choices for the long term.
Arriving at the traditional retirement milestone today is very different from that of even our parents. Many are choosing to work past the normal pension age or go into semi-retirement. The nation is generally healthier and wants to maintain an active lifestyle for many years to come.
The needs of today's maturing population are driving a demand for a new breed of product to fill the space from semi-retirement through to asset crystallisation at age 75 and beyond.
In the not too distant past, the advice was relatively straightforward; take your pension pot and buy a lifetime annuity. With retirement likely to last seven to ten years, the rates of return on offer were generous enough that there was little to be gained by considering other options.
Employers more often than not, offered defined benefit schemes where the benefits were preserved and reaching normal retirement age provided a guaranteed and inflation-protected income from the employer and a tax free lump sum. This allowed pensioners to shift into retirement while maintaining equivalent standards of living.
However, times have changed; longevity has increased and the average 65-year-old now looks forward to nearly 25 years in retirement. Both inflation and forecast investment returns have fallen sharply and there has also been a shift away from final salary pensions towards 'DC' or money-purchase arrangements that are generally well sponsored by employers.
Increased life expectancy and a low interest rate climate continues to drive down rates on standard annuities. This trend is likely to accelerate further as individuals with lower life expectancies leave the traditional market in search of better deals from specialist enhanced annuity providers.
'Secured pensions', otherwise known as income drawdown has become an increasingly popular alternative to buying an annuity.
The main problem with this however, is that an unsecured pension will stop at age 75. By that time, customers must secure an income from their pension funds, which generally means buying a lifetime annuity, or an alternatively secured pension.
Alternatively secured pensions (ASPs) were also created in April 2006 and they work in a similar way to unsecured pensions, but have different rules. They are available to people reaching the age of 75 who do not want to buy an annuity with their pension fund although a minimum income level has been introduced. Also any lump sum death benefits passed to other scheme members will be taxed and could also be subject to inheritance tax.
So what do people want and need as they approach 'retirement'?
We have to accept that 'retirement' is probably the biggest misnomer these days as there will be a much more gradual shift from income generation and asset accumulation to security of income and asset decumulation. The concept of normal retirement will no longer apply. The importance of enforced crystallisation at age 75 will take more profile and the financial decisions that shift an individual's move towards a secure income stream will be staged over the course of almost 50% of their life, starting at 50.
If the market is going to provide value to the maturing generations then the financial advice process and the financial product offerings need to change and adapt to a fundamentally different set of social and financial needs. Something must be done to accelerate change, not just by Government or the FSA but by those who are closest to the ground - the providers and distributors that deal with the issue day in and day out.
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First mentioned in Cridland Report