The global financial crisis will affect everyone in the UK; some more so than others. The challenge now is to work out the effect, but this is difficult to do when the dust has not yet settled.
Those with pensions will not escape. Most people will be looking to their financial advisers for guidance as to how the current events affect them. In the light of the current environment, advisers must look again at the circumstances of their clients, and together they may need to rethink existing arrangements.
Those close to retirement face difficult decisions. The media spotlight has been focusing on those invested in equities who are about to buy an annuity, by highlighting a potential 35% loss in retirement incomes. In reality, some may have already worked through the lifestyling process, and although their funds have been hit, they may have escaped the ravages of falls in stocks and shares. The ones most exposed are those still invested in equities but who have to buy an annuity now. This could include those in occupational schemes who can't defer taking benefits, or those who simply can't afford to put off buying an annuity.
People who were about to enter lifestyling or can put off buying an annuity may want to think about staying invested in equities, and benefiting from any potential growth. The other factor to take into account in this decision is annuity rates, which are at a seven year high, but are generally predicted to fall in the medium term. People need help to balance out these two risks, and to weigh up the effect on their retirement income of either a reduction in fund value or worsening of annuity rates.
Political focus has been resting on those who are bumping up against the age 75 wall. The Conservatives have called for a temporary suspension of the requirement to buy an annuity by age 75, and the Government is seriously considering this.
As an industry, we have to react to the plight of those affected, and work to improve their position where we can. This may mean suspending the age 75 requirement. To do so isn't unachievable but if this proposal does go ahead, then we need to talk with the Government to work out acceptable parameters on how this can be made to work in practice.
There are several areas that need to be discussed. The first is the practical system changes providers and advisers face. For example, instead of changing all letters and systems to remove mention of the requirement to buy an income at age 75, we could agree just to change letters for those aged 74. We may need to consider a legislative override; policy documents will include the age 75 requirement as well. Another concern is that the Government would need to accept that a temporary suspension means creating a cliff-edge, and someone later on will 'lose out' when the requirement is reintroduced. We also need to address that people of 75+ would be in a 'no-man's tax land'; for example how would their pension benefits be treated if they died before buying an income?
However, none of these issues are insurmountable. If the Government and the industry can work together, then this sends out a clear message to people that we are prepared to help them weather the storm.
There are only a very few people in this situation. What it does highlight clearly is that current decumulation rules don't fit people's lifestyles and aims, and now is the time for us to widen out the discussion and together review these to help people today, but also tomorrow.
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Lack of innovation for solutions