Decumulation reform overlooked by government

Reform of the decumulation period of retirement has been largely overlooked by the government, regulators and the savings industry as a way of encouraging saving, claims the Actuarial Profession.

Submitting it’s response to the Pensions Commission report, the second paper from the Profession says the overwhelming majority of all thought on retirement saving are focused on the accumulation period, with reform of the decumulation process, or the spending of the savings, being largely ignored by the Pensions Commission.

But the Profession claims the two areas are inextricably linked, because to encourage people to save they must be tempted by the prospect of attractive ways of spending their wealth.

It claims the government, regulators and the savings industry have “missed a trick” by presenting the savings process as a duty, rather than a pleasure, suggesting the very essence of the pensions industry is deferred gratification with people choosing to delay the enjoyment of consumption today, in exchange for the ability to enjoy it at retirement.

But the paper points out the rapid increase in the numbers paying substantial amounts of Inheritance Tax (IHT) proves people are dying without having enjoyed the fruits of their savings, and a clear pointer that people’s decumulation planning is poor.

As a result the Profession’s submission highlights the need to extend the range of spending options available to ordinary consumers beyond the dominant annuity market, which allow people to consume their hard won assets, not to leave them left over at the end.

To help achieve this, the organisation has identified three different ‘stages’ of retirement, including part-time and full-time retirement, where people have different income needs, such as the ability to increase and decrease income during earlier retirement.

Solutions suggested by the Profession, include the introduction of a low cost income drawdown product with automatic triggers to replace the need for frequent monitoring by finance professionals, along with the need for pensioners to spend their money faster.

Although some choose to leave an inheritance to relatives or friends, in many cases the increase in the number of estates paying IHT is down to inefficient spending. The profession claims the solution is part education and part product. As financial education will give people the confidence to manage their finances, while products such as equity release will allow them to spend their money faster.

But the organisation, points out a key element for reform in this area would have to be help with financial planning, with IFAs providing a comprehensive advice service to the relatively wealthy. For the lower earners however, the Profession says extending help to a wider audience will require a break form linking advice to product sales.

It suggests new options could involve mentoring, either in the workplace for those not yet fully retired, or in colleges and Citizens’ Advice Bureaux. The Profession also highlights the efforts of the resolution Foundation to develop a national finance resource for the eight million basic rate taxpayers, including many pensioners, who have no access to financial advice.

The organisation claims greater financial education will help consumers to understand and manage the risks they face in their decumulation strategy, and suggests the government has a role to play, both in encouraging generic information programmes, but also by harnessing the existing professional advice channels by issuing vouchers for IFA advice at the transition point between each stage of retirement.

Michael Pomery, president of the Institute of Actuaries, says it wants retired people to take control of their finances, and they need flexible retirement products with a “volume knob”, so they can adjust their income to meet their changing circumstances.

He adds: “There are two essential preconditions for this to succeed. First people of all ages need to become better educated about financial matters. Secondly, providers need to engineer better, more flexible retirement products which will cater more effectively for longer retirements and changing needs.”

Adrian Boulding, head of pensions strategy at Legal & General, says the points the Actuarial Profession make are needed because the Pensions Commission’s report was very one sided story, focusing more on encouraging people to save rather than what the savers are going to do with the money.

He adds as the National Pension Savings Scheme (NPSS) is essentially a voluntary scheme, it needs some attractive decumulation options to draw people into it which makes retirement look fun.

Boulding says: “This has got the issues the Pensions Commission missed. We need to think ahead and get going now so people can see there is going to be attractive ways to spend their money to cajole them into saving.”

But he adds the more exciting products will be very much hands-on vehicles, and consumers will need help and advice. For the mid to high end of the market, he says IFAs will be able to deliver that service, but in the spectrum below, a greater degree of education and self-help would allow people to choose whether they need to pay for an IFA, or whether they will do it themselves.

And Boulding points out: “In the market in terms of what’s happening, a number of industry players are entering the at-retirement market, while a number of advisers are also changing focus to help the growing number of people coming through to retirement with money to spend. Those coming into the market now will be able to ride the crest of the wave of baby boomers retiring for the next 20 years.”

But Alasdair Buchanan, group head of communications at Scottish Life, says he can see why the Pensions Commission kept its focus on the accumulation phase of retirement, although he does agree there is an intermediary period of retirement which needs to be looked at further.

He adds the Pensions Commission report did mention the need for more work to be done in the decumulation area, but the main recommendations focused on the accumulation process as that was its original remit. He admits it is certainly something which needs to be looked into, but the Commission doesn’t say it shouldn’t be, just that it was not their job.

Buchanan continues: “At the moment there is a sharp delineation between work and retirement, but new regulations are encouraging people not to think of it as a precipice. This will result in a very important intermediary ground, as people phase in retirement, which could prove to be fertile for IFAs helping people how best to manage the transition.”

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