At-retirement: Assessing the options

IFAonline Editor Katrina Baugh recently chaired an online Conjecture debate on the complications advisers face when assisting clients as they reach retirement. Has the client accessed their open market option? What kind of annuity is right for them? Would drawdown be better, or a variable annuity, or even a mix of products? The options are endless. The advisers on this panel of industry experts were Steve Lowe, John Moret and Vince Smith-Hughes

Listen to the full debate here

If we can start our debate with the panel’s view on the proposed abolition of the age 75 rule for purchasing an annuity?

Advising clients as they reach retirement can be complicated for advisers. Has the client accessed their open market option? What kind of annuity is right for them? Would drawdown be better, or a variable annuity, or even a mix of products?
Vince Smith-Hughes: I certainly welcome the idea of looking at the age 75 rule but I would like to point out that it doesn’t actually affect that many people. The number of people who have NOT been annuitised by the time they get to 75 is about 0.5%.

I wonder whether it would be also an option to have a money-back option which is extendable beyond age 75. I think a lot of people go into drawdown because they want to retain some death benefits rather than feeling they’ve given their fund away to the annuity provider. I think if we extended the value protection option beyond age 75 that actually might be quite an attractive option.

Would that be quite difficult to bring in from the provider’s side?
Vince Smith-Hughes: Well, not necessarily. The value protection rules are already in place. It’s just that they don’t apply past 75, so to a certain extent the template is already there within the HMRC rules. It would just be a case of extending that.

John Moret: There is the option for alternatively secured pensions, but for the vast majority 75 is the cut-off date, and I’m in the vanguard of those looking for that to be removed.  All they have said is that they plan to do away with the requirement, but we don’t know whether that means they are going to put the age up, which I hope they won’t do, or whether in fact they will remove the requirement altogether.

I agree with Vince that the numbers at the moment that go through 75 and beyond are very small, but that is partly because everyone at the moment knows that unless they are prepared to take an almighty tax hit on death using ASP then they have got to buy an annuity at 75. I don’t think it is quite right to say this will only appeal to whatever that percentage was, 0.5%, but more importantly, all the feedback one reads about is that this requirement is actually one of the biggest turnoffs to pension savings.

What would you like to see coming out of the emergency budget in respect of the at-retirement market?
Vince Smith-Hughes: I’m hopeful there won’t be any more tinkering with things like higher rate tax relief, but on the at-retirement subject I would like to see a commitment to simplify the at-retirement piece.

John Moret: Well, I’m certainly in the camp that simplification is where we should be heading. If we could move to a situation where we have a consistent death benefit regime regardless of age at death that would be helpful.

When are pension providers going to act responsibly and properly promote the open market option (OMO) in the letter sent to pension holders approaching retirement?
Steve Lowe: I don’t think the open market option (OMO) is achieving what it set out to achieve. My own view is that we should scrap the OMO completely as it only delivers access to one solution – a lifetime annuity. I think it should be replaced with what we have called in the Pension Income Choice Association, a pension passport which enables clients to sample all retirement options and not be channelled down a single tube into a lifetime annuity.

What do you think Vince?
Vince Smith-Hughes: Talking personally for Prudential, we send out wake-up information to policy holders every six months and roughly about a month before they actually reach retirement. We try to be as clear as we possibly can be about the OMO message. However, the ABI research did show last year that only about 50% of retirees actually skim-read the wake-up facts they receive, so it is difficult to make sure people do receive the message.

Do you think awareness of these extra options has grown at all over recent years?
Vince Smith-Hughes: I think awareness has increased by a small amount but we have got to face facts and see that people quite often have only got a relatively small pension pot and maybe they are just interested in receiving their pension commencement lump sum and having their income started as soon as possible.

John Moret: The industry has failed miserably up to now to really win over or educate the vast majority of the population in the benefits of looking around. You  have only got to look at the annuity section of the Money Made Clear site to see the jargon If you make it more complicated it will make life even more difficult for those that really need help.

One problem has been highlighted by another adviser.  He says we take our clients through the open market option, but we find it is incredibly difficult with some pension providers to get them to release the funds. This is particularly frustrating where a client has two to three pension pots. What can be done to improve this?
Vince Smith-Hughes: We have seen some improvements recently and a lot of that has been down to the options initiative from Origo where we have seen turnaround times for the money going to the annuity payer really improve. I think we have still got quite a long way to go though. For a start, membership of that initiative is not compulsory, and if it was then I think that would certainly be a mechanism to speed up payment of transfer funds. I also think it would not be unreasonable for the FSA to give some kind of indication of what sort of time scales they expect people to turn this money around in.

Okay, I think this ties into another question about smaller pension pots. It is calculated that around 80% of pension pots are under £30,000. Few of these pension holders will have access to independent advice. How can the industry and the IFA community better serve this large section of the at-retirement market? 

Steve Lowe: I think it is a perennial issue that gets raised, but what I am starting to see the adviser community embrace now is an alternative to delivering full advice. We are seeing a number of advisers starting to give clients access to what is often all the client wants, which is answers to some basic questions. I think this non advice is becoming an increasingly used tool and that will help the majority of clients today that unfortunately get no access to any kind of guidance.

John Moret: I want to go along with Steve in that there is clearly a need and I do not think the full advice model works for the majority so there has got to be a new means found of delivery of advice. I think we will see new ventures come to the market looking at other ways of using technology and a simplified advice regime. It is that sort of initiative that is desperately required.

Do alternatively secured pensions (ASPs) have a future if the 82% total tax charge applied to funds on death is not repealed and the age 75 rule is abolished?
John Moret: We have some experience of alternatively secured pensions (ASP) in that something like 100 of our investors have chosen not to purchase an annuity and have gone through age 75. I think we have had three actually die since going through 75, and then we have had experience of three different situations where on the one hand the dependant bought an annuity, another situation where the money was paid to charity, and the third which is still chugging through the system will have a tax charge. It may not be 82% but it is certainly going to be 70%.

It is a death benefit lottery frankly and the tax charges are random. If you died even a day before 75 the tax charge is 35%. I do think a change is required, but obviously the future of ASP is inextricably linked to the age 75 rule, so if there is a requirement still in place to buy an annuity, albeit at 88 or 85, presumably there will still have to be some regime to cover those that go beyond that. That is why I am very much in favour of doing away with the requirement altogether. 

Vince Smith-Hughes: I think ASP does have uses, for example if you have got a younger dependent then I think it’s a viable alternative, but generally speaking most people tend to want more income than you can actually get out of ASP. An annuity in one form or another will probably deliver more income than ASP so I think unless the rules are changed we probably won’t see any wide scale use for it.

In the face of rising longevity and low rates on conventional annuities consumers are looking for alternative ways of funding their long-term future.  Is there a need for more flexible retirement options? 
Steve Lowe: If we think back 100 years, the average person would live maybe five or six years after retirement. Today they live 30, even 40 years, so retirement has to change and therefore the products that support people in retirement have to change.

Vince, sorry to put you on the spot, but I did hear your chief executive saying that perhaps at a time when interest rates are low it may not be the best time to lock into a lifetime annuity. So I think if we have the largest lifetime annuity provider in the UK recognising that then clients should be considering alternatives. 

Vince Smith-Hughes: It’s a subject very dear to my heart but yes, I absolutely agree. I think we have got a lot of retirement options in the market already but there is always room for further innovation. Personally I think what is likely to happen is we might see annuity rates trending down a reasonable margin further and if that does happen it will mean it will make alternative retirement solutions that much more attractive.

John Moret: I think particularly for the wealthier end of the market the use of a range of products will grow. We will see advisers use more technology driven solutions to assist in the selection of those products and the blending of those products.

I am all in favour of choice, but with the caveat that for the mass market I do worry that more choice means more complexity, more rules and more confusion. I think getting the balance right between a solution that suits the masses and a solution for the wealthier is one of the challenges.

That ties in with another question we have which is, is enough emphasis placed on risk in the at-retirement market? Will we see a rise in the popularity of guaranteed products? 
Steve Lowe: Even a lifetime annuity has inherent risks attached to it, so we cannot escape risk. It is about making sure the solutions are appropriate for the client.

I think we will see more guaranteed products emerge in the market. I think we will see some of the guaranteed products that exist today starting to be delivered through non-advice solutions and I think it is there that we need to make sure the simple solutions exist.

Vince Smith-Hughes: When we talk about risk it is easy to assume we are talking about investment risk where in actual fact there is lots of different types of risks. Steve used the example of a lifetime annuity. Well, quite clearly someone buying a level lifetime annuity potentially with no spouse’s pension included in it, have two quite big risks there.

I think what we need to be saying to these people is, if you introduce an element of investment risk, maybe via an investment linked annuity, then you have to take on board some investment risk while decreasing inflation risk and the risk to your dependant.

We are going to finish this discussion with a question looking forward to opportunities for IFAs. Are there potential business opportunities in the at-retirement market that IFAs might be missing at the moment?
Steve Lowe: Well, I think when we look across the financial services categories I cannot think of a single area beyond the retirement space that is going to grow as aggressively as the at-retirement market.

I think people are starting to recognise that but it is still surprising when we talk to IFAs how many still disregard the at-retirement space. Let us make sure we educate those IFAs that are not participating, but I do think that the non advice space will be very exciting to a number of advisory businesses that otherwise seem to be suggesting to us that they do not see how they will be able to profitably support their clients. It will be a travesty if, in the UK we are finding customers still aren’t being given answers to basic questions that would help them make some better choices, so I am very hopeful that we will be able to encourage more advisers to participate in the retirement space.

Vince Smith-Hughes: The two points I would like to make are just make sure the at-retirement process is absolutely set and you are considering not just annuities but obviously the full range of products available. It is also important to say it is not just the at-retirement market; it is the in-retirement market. Advisers do not necessarily want to be waving goodbye to clients when they buy a product to 65. People are now living for 20-30 years in retirement and I think there is scope there to continue to give those people advice.

Listen to the full debate here