Colin Bell discusses the findings of the Retirement Planner at-retirement research
The results of the recent Retirement Planner online ‘at-retirement’ survey make for interesting reading. In many ways, the answers reinforce what we already know about the challenges around turning accumulated retirement funds into the most appropriate balance of retirement benefits, given an individual customer’s circumstances and attitude to risk. However, dig a little deeper and some new perspectives emerge.
The bulk of retirement pots being encountered are still less than £150,000 but I’m sure the average is edging up and that the number above £75,000 is far greater than would have been the case ten years ago.
Traditional pensions are still the most common vehicle for retirement saving but the survey shows the extent to which ISAs are now seen as a key part of that savings equation. Clearly, the combination of tax advantages and flexibility are proving to be a real attraction. I wonder if this desire for accessibility is a pointer to the future design of retirement savings vehicles? If the UK is going to be successful in encouraging wider and deeper retirement saving among the population, perhaps we need to consider structures in which savings are not necessarily locked away until retirement but can be accessed in specific circumstances?
Property is still seen as an important element in retirement saving but are people really thinking about how they will use the value in their home to support their retirement income? Are they expecting too much from their property – being able to live in it; somehow use it to support their retirement and still pass it on to their children when they die? Equity release is an obvious way to generate income from the housing assets they have built up while still being able to live there.
However, an interesting result from the survey is that 67% of responding advisers say that they are either not qualified or not interested in advising on equity release. While the current economic environment presents some specific challenges around funding equity release plans, this remains a largely untapped market and one that must surely grow in the future.
Income drawdown and traditional annuities are still the most commonly used options for securing retirement benefits. Indeed, there appears to be growing interest in income drawdown among the advisers who responded to the survey. Is this due to public perception of a lack of flexibility or a lack of value in annuities or is it an inevitable by-product of the growing interest in another method for securing retirement income – namely enhanced annuities?
Enhanced annuities can allow those with medical conditions to qualify for larger annuities. These developments effectively move the market closer to individual underwriting – diluting the historic cross-subsidy between the unhealthy and the healthy – so the healthier lives will see annuity rates as a poorer deal and move towards alternative options such as income drawdown.
The question is then whether these individuals will be comfortable with the associated market risk inherent in drawdown? The main concern here is the sequence of investment returns in the early years after starting to take an income from a fund still linked to the markets. This is the period of maximum risk when the fund is at its biggest and poor returns at this time can condemn a fund to the risk of early depletion.
Unit-linked guarantee products offer insurance against these worst-case effects. For an additional charge, the client can benefit from the flexibility of the underlying unit-linked product but with protection for their future retirement income should the worst happen. In essence, this is simply insuring your retirement income while benefiting from other product attributes. Given the stakes involved, we would expect many clients to be willing to pay the additional guarantee charge for the peace of mind it brings.
So far, the survey demonstrates that relatively few of the respondents’ clients are currently using unit-linked guarantees at retirement. As the benefits become more widely understood, I believe this position will change.
In conclusion, the traditional view of retirement is changing to one that is more complicated and spread over a longer period. Advisers will need a range of solutions to help them frame strategies, which are tailored to their clients’ needs and circumstances. We need a social and legislative framework which supports people in making the right choices for them.
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