At-Retirement Choices must be supported by definition of Simplified Advice
19 May 2014
Making annuity purchase voluntary at retirement only works if consumers can get better and more affordable access to financial advice to help them navigate the increased number of retirement options Money Marketing’s MM Wired debate on the ‘Budget Bombshell’, aired last Friday, proved very insightful.
Former Whitehall pensions policy adviser Ros Altmann argued very effectively for the need for providers to create a range of annuitised products which more closely mirror the changing nature of people’s retirements today, ditching the poor performing, limited functionality single life annuities that currently predominate. Altmann argued for a need for at-retirement product providers to develop a range of hybrid products that sit between Drawdown and Annuities. She also posed the idea that many over 55 year olds with smaller pots, may be better off taking all of that money out of the pension tax efficiently (something that will be possible come next April) and investing it elsewhere to generate higher returns. Those enlarged savings pots could then be used to purchase a much more favourable annuity, boosted by the more favourable rates that will inevitably be available to us if we hold off annuity purchase, say, into our early 70s. If you have an identified illness by this time you will of course be able to access even more favourable enhanced annuity rates.
Another option, perhaps for those of us with slightly larger pots, is to take the tax free cash at retirement and leave remaining funds uncrystallised until later in retirement – again putting off that annuity purchase until later in life. The panel went on to discuss the concept of ‘individualised guarantees’ which would be much more tailored to the specific circumstances of the person. All agreed that the concept of annuitisation is still very attractive but that the annuity product as it stands today is too inflexible. Annuities to date have been bought to date at the point of retirement so somewhere between 60 and 65 nowadays.
At this stage we may be looking at 20 years of healthy retirement. Increasing longevity demands that annuity rates will continue to fall if bought at traditional retirement age. Rates have been worsened by a combination of a long-term low interest rate regime and Quantitative Easing which have negatively impacted gilt yields upon which annuity rates are based. One of the panel, James Lloyd of think tank Strategic Society Centre, makes it clear that the problem with annuities is often the language that is used to describe them and the fact that the inflexible nature of the product today will make people naturally avoid them if given the choice which they now have.
So if you ask people today whether they plan to use their pension pot to buy an annuity at retirement only about 17% support this idea. However if you ask the same group whether they would like to purchase a product which guarantees income for the rest of their life - over 70% favour this concept. In other words much of the problem with annuities today is the way they are perceived – they need repositioning. But as the debate also suggested it needs to innovate to create hybrid products which offer the option to annuitise or even cash-out, when the time is right. There was consensus around the idea of annuitisation itself however.
However what is now needed is a broadening of the at-retirement product options, many of which still need to retain a guaranteed income element. But with all the additional choice and complexity that will inevitably reach the market over the next few years; there comes real risks of confusion followed swiftly by inertia, particularly without sound and affordable financial advice. Studies (also highlighted by Mr Lloyd) show that as we get older we also become less financially confident and our numeracy even falls. Put simply we are more likely to make poor financial decisions without great guidance.
So the Guaranteed Guidance that the Chancellor has suggested, alongside these market changes, is clearly a nod in the right direction. However all were agreed that much more clarity is needed quickly on the type and level of guidance that is needed to support the more complex at-retirement choices that we all now have. If, as is anticipated, whole of market independent advice seems unpalatably expensive for many (the Government’s offer of £20m certainly will not cover it), and non-advice based support does not offer appropriate safeguards to consumers; we really must now define a more palatable middle way – Simplified Advice - which of course is already on the FCA’s To-Do list. The argument of this panel, quite rightly in our view, is that if choice is to be managed in favour of consumers it needs to be married with proper definition of more cost-effective Simplified Advice – offering simple advice and fixed processes which enable advisers to provide vital at-retirement advice as early as possible in the retirement planning process.