Dave Harris explains why the wake-up letter alone is not enough
One big issue for retirees who have built up money purchase pension pots is how best to exchange it for an income. Positive thinkers will probably look closely at all the options available to see which best fit their needs, not just for the next few years but for the whole of a retirement that could last two, three or perhaps four decades.
Income boosting option
In reality the majority of retirees fail to latch on to the affirmative by considering all the options. The market today offers conventional lifetime annuities, enhanced and impaired annuities, and fixed-term annuities. For those comfortable with potential income fluctuations there are with-profit annuities, unit-linked annuities, guaranteed drawdown in the form of variable annuities, phased retirement and finally full fat income drawdown. Those who own homes have the income boosting option of equity release.
That is 10 choices of different plans, some of which could be combined or bought in stages to maximise the benefits. Instead, very few people seem to get further down the list than choice number one about nine in 10 people buy a conventional lifetime annuity, typically at the point of retirement and about two-thirds fail to shop around for the best rate. And once locked in, they can never switch to a different plan.
The continued domination of the early retirement market by conventional lifetime annuities is for negative rather than positive reasons: tradition, inertia, lack of education about how pensions work, lack of knowledge about other options, and lack of access to good independent advice. Low-take up of the open market option suggests buyers simply are not switched on to the need to get the best deal at this crucial time of life. It is true that those with small pension pots have fewer alternatives, but for the burgeoning middle market there should be far greater awareness of the range of opportunities.
Change is upon us
Things are changing. In recent years, enhanced and impaired life annuities have gained ground among those who are statistically likely to live fewer years than the healthy, such as the obese, smokers and those with medical problems. Sales are growing, helped by innovations such as postcode annuities, but still only account for about one in 20 retirees.
This low number reflects the fact people in their early to mid 60s are usually in reasonable health. Anyone who takes an income but delays tying into a lifetime annuity until they are in their mid to late 70s is far more likely to qualify for an enhanced rate at that time. But the fact they lock into conventional lifetime annuities early means they lose the chance to switch later.
This dilemma of when to annuitise and what to do in the meantime sums up the traditional polarisation of this market, between the secure but inflexible lifetime annuity and the more flexible but more costly and complex income drawdown. It is little wonder the majority of retirees took the lifetime annuity because the risks of drawdown were just too big to contemplate. But things have moved on. New providers have entered the middle ground with a range of plans. And as word about the new choices spreads, retirees will increasingly scrutinise the options in search of the best deal or combination of deals for their individual circumstances.
Similarly the popularity and sales growth of fixed-term annuities has been driven by people's need for an annuity-like secure income in a product which allows them to keep their options open to swap to a different plan at a later date. They recognise it is difficult enough to predict what might happen next week and impossible to forecast decades ahead. This applies to the cautious healthy or otherwise who think locking in to a single rate for the rest of their lives is itself an unacceptable risk.
The key to the growth and development of these middle market options remains in the hands of IFAs. Financial advisers are at the front line of promoting the richness of this middle market and well placed to benefit from it.
A tidal wave of change is building as many within the industry recognise the need for modernisation and a fresh approach to how people in retirement select their income options. Many IFAs and industry stakeholders are openly challenging the status quo that sees 90% of retirees selecting just one of the 10 options available to them in retirement. This is summed up in the success of the OMO Offer More Options campaign that has already seen over 1100 IFAs sign up to promote the need for retirees to get the best solution at the optimum time. This is not only good for consumers, but also for advisers who can deliver expertise not just at retirement but throughout retirement too.
Dave Harris is managing director sales and marketing at Living Time
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