In the first of four instalments of in-depth research into the retirement planning market Helen Morrissey looks at the challenges and opportunities facing advisers operating in this market.
There are many factors contributing to the increased interest in retirement planning. Increasing longevity coupled with the Baby Boomer generation reaching retirement have raised important issues about whether the general public are saving enough to give them a reasonable standard of living in retirement.
Retirement Planner carried out this survey in association with Scottish Widows to gauge the issues advisers face when advising on retirement planning. A survey was circulated to our readership by email and we received responses from 192 participants.
We started off by asking participants how much of their business retirement planning accounts for.
The answers show it accounts for a large percentage: 11% said retirement planning accounted for less than 10% of their business, while 18% said it accounted for between 11%-25% of business.
Almost four in ten (38%) said retirement planning formed between 26%-50% of their business, while a further quarter said it accounted for between 51%-75%.
Seven per cent said retirement planning formed between 76%-99% of their business, and 1% said it accounted for all of it.
Prospects for growth
We then went on to ask participants how they expect the retirement aspect of their business to develop over the coming 12 months. Growth was widely predicted, with 25% saying they expect this part of their business to grow to a large extent.
More than half (51%) expect it to grow to a small extent, while 19% expect it to remain the same. Only 6% predicted retirement to shrink as a portion of their business (see chart one).
There were many reasons why participants expected this area to grow. Perhaps not surprisingly, the Budget changes were cited as a key factor for growth, while increasing longevity and auto-enrolment were also seen as important factors.
Uniq Family Wealth managing director Marlene Outrim believes clients' changing expectations regarding lifestyle are also fuelling increased awareness of retirement planning.
"As financial planners, we focus on financial independence and so this will cover retirement planning even if the clients are relatively young," she says.
"We are finding that people are working longer and phasing into retirement to retain their standard of living. They have enjoyed a certain standard of living when working and don't want to give it up.
"This is a big difference to previous generations of retirees who accepted their lifestyles would change and that they might have to give things up."
One interesting point is that while the Budget changes were seen as an opportunity for growth for many people, they were also seen as a factor behind retirement planning declining as a proportion of some advisers' business.
One survey participant said they expected clients to hold off making retirement decisions as a result of the new rules, while another said they expected to see a drop-off in annuity sales as people take their pension fund in cash.
Participants were then asked to explain more about the challenges they face when advising on retirement issues, naming their top five challenges along the way.
The two major issues highlighted by 74% of advisers in both cases were that clients do not understand the importance of putting a plan in place, and clients have not saved enough.
Also level pegging with 68% each was the fact that clients do not trust pensions and poor annuity rates. The rate of regulatory reform was highlighted as a major challenge by 50% of participants (see chart two).
Other potential challenges include client anxiety about making the right decisions, with one saying: "Clients fear they will get it wrong, even with advice," while another said: "Many think about saving for retirement, but few think in advance about what to do with money at retirement."
Products and strategies
The retirement market has evolved over recent years, with the growth in the enhanced annuity market and development of income drawdown being just two areas of product development.
Advisers have had to work hard to gain knowledge of the different products and strategies on offer so they can advise on them in a confident manner.
We went on to ask participants about the product areas they advise on. Not surprisingly, personal pensions came top with 74% saying they advise in this area. This was closely followed by standard annuities, which were mentioned in 71% of cases.
The rapid growth of enhanced annuities was reflected in that 69% of participants said they advised on them, while 64% advised on flexible drawdown.
Other product areas mentioned included capped drawdown (62%), SIPP (59%), investment-linked annuities (54%) and fixed-term annuities (53% – see chart three).
Flexible drawdown has come a long way since it was introduced in 2011, and it is clearly a tool advisers find useful.
As such, it comes as no surprise that flexible drawdown was the most popular answer (67%) when participants were asked to name the areas of the market that would experience most growth in the coming five years.
Auto-enrolment was also a popular choice and was named by 57% of participants, with SIPPs coming in close behind with 55%.
The Budget announcements have brought great uncertainty to the annuity market, which could be a factor why after years of strong growth, enhanced annuities were only named by 23% of participants as a major growth area.
However, Bradbury Hamilton CEO Sheriar Bradbury believes they will continue to play an important role in retirement planning: "I still feel that there is a place for enhanced annuities – I don't believe that market will die off. Having a guaranteed income is still very valuable for many people. It's just been the case that standard annuity rates have been so poor over recent years."
Fixed-term annuities were named by 17% as a major growth area, while investment-linked annuities were named by 16% of participants (see chart four).
Holistic approach to retirement
The days of retirees choosing to go down the annuity or income drawdown route are over. Increasingly, advisers are adopting a more "mix-and-match" approach, whereby a mix of different approaches are utilised over time to meet clients' changing needs. The shift to this more holistic approach was demonstrated in the survey, with 74% saying they have adopted this approach.
But while this approach has merits, advisers face real challenges in trying to go down this route. Low annuity rates were mentioned, with one participant saying: "Annuity rates are low, which means clients have wanted to adopt a higher level of risk than they would have adopted beforehand. The challenge is to manage expectations of that risk."
Complexity was another important factor, with one participant saying adopting such an approach was clunky as it involved working with several providers. Others pointed to the sheer amount of paperwork involved in adopting such an approach.
Achieving the correct balance between strategies was also seen as a concern, while ensuring clients have a sufficient level of assets to consider such an approach was also an important factor.
The cost of providing such a service is also a major challenge, especially for those with smaller fund values, says Bradbury: "It is a major challenge for us to ensure we can deliver advice that is cost effective for someone who may not have much money and yet may have complex needs.
"More needs to be done to reduce the regulatory burden on IFAs to enable them to advise more people."
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