Helen Morrissey talks to a panel of industry experts about the challenges facing the retirement market
Clive, can you tell me about what you see as the key factors currently affecting the market?
Clive Bolton: Firstly, the economic conditions have affected people's funds. But the volatility, particularly in the credit market, does mean that annuity rates are low and change rapidly. That makes for uncertainty when picking the time to retire.
It is important to mention that actually, the standard model of retiring when you are 60 is now almost completely dead.
We are also seeing an increasing issue with debt. Customers are now coming into their 60s - and even into their 70s - with substantial amounts of money on their credit cards, perhaps even mortgages, still outstanding.
There is very little guidance about what to do with those in their retirement when their income falls.
Darren, how do you feel the industry has met these challenges?
Darren Dicks: We have seen quite a level of innovation over the past five years. There has been a lot of new products, such as the development of enhanced annuities as well as fixed-term annuities and equity release.
I think what is definitely needed now is a change in the way we view retirement as an industry. Quite often, we just look at pension pots. But we also need to look at what other investments they have. How much debt do they have? I think the industry is moving, but there is probably more to be done.
How much do you think the public understands the effect of increasing longevity on their retirement plans and what challenges does that bring to the adviser?
Nick Flynn: I think they are beginning to understand. I think the value of people's pots has been relatively stable, but it is the annuity and GAD rates that have really shaken people up. What we have not done is communicate it very well.
What can advisers do to help their clients?
Billy Burrows: Education is the most important factor, as well as advice. Looking at it from the customer's point of view, they come to retirement not knowing an awful lot about pensions. But there is a very steep learning curve.
What I have found is that most people are not stupid and they can understand the concepts if explained correctly. But that's the difficulty - there just aren't enough people able to explain the options in a language they can understand.
There has been a lot of talk about alternative-type annuities. What kind of demand are you seeing for these kinds of products?
Dicks: Increasingly, the market is moving more to an increased proportion of enhanced or impaired. In terms of third-way products, investment backed, asset backed or fixed term, the market is still quite young.
I mean, those products have been around for a number of years, but it is only recently that a number of providers have entered that market.
From an adviser point of view, it helps credibility in terms of putting a proposition to the customer if there are more brands in that market.
Burrows: Annuity rates now are so low that I think we have to question whether the guaranteed annuity should still be the default option for those with above-average funds, especially if people are living longer.
Dicks: The heart of the problem is you have people making decisions about a long-term contract on some very short-term criteria - give me the guarantee, give me the highest rate. This does worry me.
Bolton: That is where we see fixed term as an important tool in the mix. You can actually effectively build in a decision point some way down the line, saying "OK, it's going to be like this for a few years, but it might not be like this forever", so it gives you another throw of the dice, so to speak.
Flynn: I think for the first time, people are realising it is unlikely annuity rates are going to improve in the medium term. There is no light at the end of the tunnel that I can see, and I can't imagine many consumers do either.
How are clients viewing different kinds of annuities, and also drawdown?
Flynn: We are seeing the portfolio approach quite often. Most people have state pensions in payment. A lot of people have got DB benefits.
It is generally a fear of anything unusual. People love enhanced annuities because it seems to be a safe haven. Yet they get higher than the standard rates.
Our drawdown enquiries tend to be far larger than they used to be, not by the number of individuals, but by the funds. So instead of £200,000 to £300,000, they are more like £500,000, £600,000, £700,000 and £800,000.
Dicks: Are you seeing a lot of those customers go into flexible drawdown?
Flynn: What we are seeing is an awful lot of people prepare themselves for that. They have bought themselves that flexibility. They haven't turned it on, so it is there to be used when and if they need it.
Burrows: I think that is quite important. I am finding that we are doing an awful lot of flexible drawdown. One of the things driving it is customers fear the rules might be changed and they might raise the bar in the future. So, buying £20,000 pa income today seems quite a good bet.
I know the whole issue of people retiring in debt has been brought up already. What role do you see the equity release market playing with regards to those pensioners?
Dean Mirfin: We do see a considerable amount of supplemented income in retirement in those early years, where people have maybe been used to using credit cards during their working life but clearing the balance.
Suddenly in retirement, we hear of a case of a considerably larger expenditure, it goes on the credit card and that is their first experience of not clearing the balance. This carries on and so it is not uncommon for us to see quite sizeable credit card debt.
I think the other problem is endowment shortfall. We see a lot of people beyond 65 with £30,000 to £40,000 outstanding on mortgages. They come to a deal with a lender where they are allowing that to continue on an interest-only basis.
I think equity release, and other solutions for that matter, will play an increasing role in mitigating some of that debt.
Bolton: There are two distinct populations. There are the older, perhaps wealthier, people who get to a point where they want to make a large expenditure.
Perhaps they want to help the family or help with student finances. They want to start distributing and gifting while they are still around to see the benefits of it and see their family prosper.
But, every year, what we see is another group of customers who are, say, in their early 60s and their housing wealth is a lot smaller.
A lot of that is around continuing their lifestyle and perhaps they have always mortgaged their equity out of their house as a way of supplementing their lifestyle throughout their working life. Now they are finding the options to service the debt they have already accumulated are narrowing down.
We have seen more credit card debt because they can't get other forms of loans. They start looking to solutions like equity release.
Flynn: You know, generally, we have sat down with clients where for an hour we have no idea why they want to release equity, and then suddenly they tell us about their £40,000 credit card debt.
Pre-retirement, they never accrued anything like the sort of balances they have, and they feel quite embarrassed.
You do have to look more closely at how that situation arose in the first place and then develop a solution to make sure that if that pressure is there again, there is a solution for it.
Nick, you might have mentioned earlier this whole portfolio approach to retirement. We have heard a lot of talk about it, but how widespread is this practice right now?
Flynn: I think if you just get it as a science, then it is not hugely widespread. But I think people naturally do that.
I mean, people have income from very different sources in their lifetime anyway, but it is quite obvious now that people are starting to look at different bits and pieces. So, for example, they have got state benefits - maybe defined benefit and an AVC.
It is becoming more widespread, there is no doubt about it, rather than just for the wealthy, but it is far from reaching everybody. It needs to develop.
Burrows: I do an awful lot of this with my clients, and I think the reality is you probably need a couple of hundred thousand to have a sensible split. But there is no reason why somebody with £100,000 pot couldn't have a split.
We need an insurance company to come along and say to the customer "Here's a simple proposition, give us your money and we'll make you one payment every month."
Behind the scenes, some of it will be guaranteed, some if it will be flexible, and some of it will be investment-linked, so watch out for the first portfolio annuity - and I want copyright on the name.
Darren, what do you think of Billy's suggestion?
Dicks: I guess the first thing is we need to make sure it would sell. You only have to look at the fixed-term market.
It hasn't taken off and, from our perspective, we have got lots of things we could develop our product development expenditure on. So we have launched fixed term. It is going well, but it can go better and we are constantly trying to get the message out that advisers should look at the whole range of options and not put all their eggs in one basket.
I think it is a gradual thing that evolves. You will find that insurance companies will try and package it all together.
Burrows: With the Retail Distribution Review coming along and the worry that people won't have access to advice, do you think products like fixed-term can be sold through no-advice channels?
Dicks: Well, at the moment we only allow that on advice basis. I guess fundamentally that is because our fixed term is slightly different. It has got an investment element which we believe needs advice.
Bolton: Just to add to that, I think fixed term is new and I would just like to see it almost incubate in an advised environment so we get to understand how it works and how it performs.
We can then look at the lessons and see if we can make it more formulaic, perhaps for a restricted set of options. But until the market matures a bit, I think it is probably too early to tell.
Dean, I know that Key has got an annuity desk. Could you see a point where you guys are offering fixed-term annuities?
Mirfin: I think the whole fixed-term debate is quite interesting. One of the things we are conscious of when looking at fixed term is its potential to generate recurring business.
Whether advised or non-advised, you should want to embrace the potential from a business perspective.
I think fixed term is about flexibility, it is about prolonging access to choice, it is about health. We have to be smart at defining what the product is about.
I think the danger in the non-advised environment, if not managed correctly, is fixed term becoming pinned too much on one aspect.
For some clients, this actually won't be the desired outcome. What if the client comes out at the end and remains healthy and rates have gone down further? They could be worse off than if they had bought a conventional annuity in the first place.
Flynn: There is no doubt anyone who bought them five years ago, and has got the maturity coming up but remains in good health, will be very upset.
We will just move on to the whole shopping-around process. It has been a big issue for the market for several years and we have most recently seen the Association of British Insurers' code of conduct. What impact do you think it is going to have on the whole shopping-around process?
Flynn: It has just added to the pressure. Instead of accepting the benefit, it has become the norm. It is not going to make a huge difference but it is another step, another of many steps that has happened or is happening.
The biggest step was probably the Options system, where the money can actually move quicker. It is all very well saying "You have got an open market option, but it takes three months to happen."
Burrows: One of the dynamics I am seeing is that we are telling people to shop around for their annuity. But of course, when they shop, the only metric they know is price.
On the one hand this is a good thing, but I think there is a bigger issue. We are seeing people trying to squeeze out even another £50 worth of income while ignoring the really important question: should they be buying an annuity in the first place?
This roundtable discussion is part of a longer debate. You can listen to it HERE
Round table speakers
Nick Flynn is divisional director of The Retirement Adviser, part of LEBC Group
Specialist in at-retirement advice for the past 15 years, frequently in the financial and consumer press on retirement and pension issues. Flynn also runs The Retirement Adviser, an award-winning, whole of market, advice-based specialist IFA.
Darren Dicks is head of at-retirement at Aviva
Dicks leads the business development team and at-retirement IFA sales force. A qualified accountant, he has been with Aviva for ten years where his at-retirement expertise has seen him leading the launch of postcode pricing, online enhanced and web developments, such as online quotes for end customers.
Clive Bolton is at-retirement director at Aviva
Bolton is responsible for Aviva's at-retirement business, providing customers with retirement income solutions. He is one of the company's main commentators, campaigning to help improve people's retirement experiences. Bolton is also MD of Aviva's equity release business.
Billy Burrows is director of The Retirement Partnership
Burrows has been advising clients on all aspects of annuities and pension drawdown for more than 20 years, making him one of the country's leading annuity specialists. In 2010, he incorporated William Burrows Annuities with Better Retirement Group Ltd to provide clients with a wider range of financial services.
Dean Mirfin is group director at Key Retirement Solutions
Mirfin was involved with setting up Key Retirement Solutions (KRS), which is now the UK's largest independent equity release specialist adviser. As a KRS group director he plays a strong part in the growth and development of the business both directly with KRS, and by working closely with business partners.
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