Advisers probably won't be surprised to hear that people are far more likely to consider insuring their pets and mobile phones than their retirement income. This was one of the findings of AEGON's recent consumer research.
When times are good and equity markets are performing well we tend not to pay close enough attention to our attitude to investment risk. However, we all know the stockmarket volatility of the past couple of years has had serious impact on many people’s pension funds and their ability to provide a secure income stream from their investments. Against this background we wanted to test people’s attitude to insuring retirement income and controlling investment risk. We asked just over 1,400 people what their concerns were when thinking about retirement and what their views on insurance are.
The research found that while the highest ranking concern for retirement – for three out of 10 people – was running out of money, people are far more likely to insure their pets, holidays, freezers and even mobile phones than they are to insure one of their most valuable assets, their retirement income. Fewer than one in 50 said they would currently consider insuring their retirement income which suggests people are either not aware of that possibility or do not understand the value of doing so.
On the plus side, when asked what statements relating to insurance people agreed with, 65% said it provides peace of mind in case of loss or damage. With household insurance, people hope they never have to claim but know they are covered if the worst happens. They therefore feel it is money well spent.
So why the apparent reluctance to insure retirement income, particularly when the impact of sudden stockmarket movements on people’s funds has been so visible in recent months? We probed a little more deeply to test people’s appetite for unit linked guarantees specifically and how much they would be prepared to pay for them. A surprisingly high number of people – 45% – said they would consider buying a product that insured their retirement income never fell, was guaranteed to be paid for the rest of their life, and had the potential to rise over time. And, while the cost of guarantees is often cited as one of the biggest barriers to sales of these products in the UK, more than half of respondents said they would be willing to pay an additional amount to insure their retirement income.
In future, more and more people will approach retirement with funds built up from defined contribution pension plans. Not all will want to opt for either the complete security, but also inflexibility, of an annuity or the flexibility, but full investment risk, of unsecured pension.
People seem concerned about running out of money in retirement but that no longer means they have to give up all income and inheritance benefit flexibility. The research indicates that, when offered the option, many could be happy to pay for a guarantee that underpins their income. However people are generally unaware of the practical steps they can take to make sure their retirement income doesn’t run out. It’s important we address this knowledge gap and do more to educate people on the benefits of insurance and the peace of mind it can bring.
Rachel Vahey is head of pensions development at AEGON Scottish Equitable.
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