A recent report issued by AIFA and Prudential highlighted the growing importance of the decumulation market and the issue of ensuring people access the best advice. Helen Morrissey takes a look at some of the key findings.
While much emphasis is being placed on retirement, up until now the bulk of attention has been on the accumulation part of the market.
However, as we are all living longer and retirement can stretch into thirty years or even more, we are seeing an increasing need for advice and guidance on how to manage income during this time.
In June AIFA and Prudential released a report on how best to provide advice for those in retirement. The report, Financial Planning Through Retirement came up with several key recommendations. These included increasing the role of the employer in providing access to financial advice as well as more emphasis on ensuring retirement products are easy to understand. AIFA also pledged to formulate a good practice guide for those advisers looking to specialise in the decumulation market.
“The fact is that while most people are broadly aware of the need to save for retirement far too many do not, either because they are unable to afford to do so or, despite their best intentions, do not get round to acting on that knowledge,” says AIFA’s director of policy, Andrew Strange. “Few people are similarly aware of the need to plan once they have retired, to make the decisions necessary to make the most of what they have. The reality is that people in retirement need advice and help. That conclusion will come as no surprise to anyone working in the retirement space.”
Prudential’s managing director, retail life and pensions, Barry O’Dwyer called the report “a huge step forward” and pointed to the decumulation market as being a major growth area.
“Up until now the majority of money and product development has gone into the accumulation market with the development of portfolio planning tools etc,” he says. “Less time and money has gone into the decumulation market – this will change going forward as retirement patterns change and people are in need of advice during their retirement years.”
In addition to an increased emphasis on the decumulation market the report pointed to the need to take a wider ranging view of retirement rather than just focusing on income coming from pensions. By taking into account assets such as ISAs or even looking into equity release, the adviser can do much to ensure their clients enjoy a more comfortable retirement.
“There must be a holistic approach to the decumulation market from industry, government, regulators, and employers to ensure that more people maximise their income and wealth in retirement,” says Strange. “We must make sure that consumers can access good, professional advice when needed and that the industry can provide access to a wide range of services and products to utilise the variety of assets retirees now have.”
Strange points to the powerful effect increased knowledge can have in helping people make informed choices. He uses the instance that a 65-year-old man purchasing an annuity with a £200,000 pension fund in August 2008 could expect an annual annuity income of £15,480.
However, if the decision was taken just one month later then the annuity would be worth £2,000 a year less. If the client understands how annuity rates can fluctuate then they may choose to make alternative arrangements and purchase their annuity at a later date.
However, if we want retirees to be able to make informed decisions of this kind then we need to ensure they are properly engaged and understand how their options work. Up until now, much provider literature can be difficult to understand leaving people confused as to their best option. As a result the report highlights the need for the development of a jargon buster to enable people to better understand the products they purchase.
“It is clear that consumers will understand the risks and rewards of decumulation products better if they are described in consistent language,” says Strange.
“However, we must recognise that consumers want access to advice not just endless information. That is why they turn to IFAs. Government and employers must do more to help consumers receive independent advice.”
According to Prudential’s O’Dwyer, the industry also needs to understand how customers actually go about making decisions rather than making assumptions.
“We have to look at alternative ways of engaging people. In the past, we have treated people as though they are willing to spend time going through huge amounts of information in order to make informed decisions,” he says. “People do not operate like that. We need to really analyse how people make financial decisions rather than making assumptions.”
Joint managing director of IFA firm Informed Choice, Martin Bamford, agrees with the report’s findings, saying that advisers and product providers need to truly understand their clients’ needs.
“We have to appreciate that different people want or need different things when they reach this stage in life,” he says. “Some want information so they can assess all of their options and make a decision. Others need guidance to send them in the right direction, before making their own decision. Others still need advice based on their personal circumstances, goals and objectives. It is important that we cater for all of these audiences.”
Role of the employer
While the report highlighted the increasing need for independent advice, it also looked at how this advice could best be administered. While some retirees recognise the need to seek out independent advice, many do not and so the report looked at how people could access advice more easily. Is there a role here for the employer as a provider of independent advice?
“One particularly interesting aspect of the report was the role of employers in our savings culture,” says Strange. “Our primary research showed how much employees still value their employers when it comes to advice around pension saving. This is an area that we believe employers and the Government can build on.”
While O’Dwyer agrees with the recommendation, he is quick to point out that employers will need to be incentivised to engage their workforce in financial planning. However, he warns there would be challenges ahead.
“As workplace pension provision moves from DB to DC this is a sign that employers are actually looking to become less engaged in their employees’ pension planning,” he says.
It is clear that the challenges of providing workplace advice will be just as large for the adviser as for the employer. Bamford says that only the most proactive advisers will make any real head way in engaging employers and employees in this way.
“Employers can play a very important role in the provision of information, guidance and even advice through the workplace,” he says. “The sad fact of the matter is that very few are interested in doing so. Where we have been appointed to advise employees on schemes with an employer contribution before, the existing take-up rate has been tiny and it is only the involvement of a proactive IFA that sees members joining the scheme in large numbers.”
However, he did say that the advent of personal accounts would do much to engage employers on the subject of pension planning though he adds that this process “may not be a happy experience for many and they will need lots of encouragement from specialists.”
The AIFA/Prudential report has highlighted many of the main issues affecting the retirement industry at the moment. Increasing longevity means that there has never been more need for ongoing advice throughout people’s retirement years and advisers need to take all of a client’s assets into account when developing retirement planning strategies. Engaging people in their financial planning is a more wide ranging affair with providers needing to do more to make products and processes easier to understand and there is clearly a role for the employer to play in enabling employees to access quality advice. There is much work to be done and the industry will face many challenges along the way but if the recommendations outlined in the report are adopted in a wholesale way then it can only be good news for the industry, advisers and most importantly the client.
Equity release - box out
If advisers are to ensure they offer the most comprehensive retirement planning advice, they need to ensure that all of a client’s assets are taken into account. As a result, the report highlighted the growing importance of products like equity release as part of a holistic retirement planning strategy.
“We discussed equity release as part of the paper and realised that it has an important part to play in people’s retirement planning,” says O’Dwyer. “We’ve always assumed that people will have predictable income requirements throughout retirement but this simply is not the case. People may choose to take more at the beginning of retirement for instance, then less in the middle and then more again at the end. There is a lot more that needs to be done to provide people with more flexibility.”
The report’s findings were endorsed by Safe Home Income Plan’s (SHIP) director general Andrea Rozario who sees the report as being indicative of an increased understanding of equity release.
“It is good to see that people are increasingly recognising that equity release has a part to play as part of a holistic retirement planning strategy,” she says. “We need to build on this positive feeling and engage with people so that they understand the products. We need to continue to raise the profile of equity release so that people realise they have nothing to fear. If they understand both the risks and benefits of taking out an equity release plan then at least they can make informed decisions. We just need to reframe how we approach and talk about equity release.”
The increase in minimum AE contributions has had little impact on opt-out rates - with cessations after April increasing by less than two percentage points, data from The Pensions Regulator (TPR) shows.
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