At-Retirement: Increasing choice

In this month’s Inquiry, Helen Morrissey assesses the results of our survey on the ­ at-retirement market and asks how the advent of flexible drawdown will affect the market

The relaxation of the Age 75 rule and the introduction of flexible drawdown will have a huge impact on many people’s retirement ­planning. With the effective ­compulsion to annuitise now removed, clients can remain in drawdown indefinitely if they choose.

Obviously, this has a huge effect on advisers as they need to manage their clients’ investments for longer. In the case of flexible drawdown, they will also need to advise clients on the most tax-efficient ways of extracting income from their ­pension.

In this Retirement Planner Inquiry, we asked advisers to let us know how these changes will affect the at-retirement market. We sent out a questionnaire via email and received responses from 98 ­advisers.

Fall in demand

The first question we asked was whether they had seen much demand from their clients for flexible drawdown. Much has been made of this new option, but the £20,000 minimum income requirement needed to take part in flexible drawdown could prove prohibitive for the vast majority of people.

Almost a third (31%) of those who responded said that they had seen demand from their clients for this option, though more than half (60%) said they had not.
When asked how much of an impact the advent of flexible drawdown would have on the retirement market, the views were similarly divergent. One adviser said: “It adds a much-needed widening of retirement options, particularly as annuity rates will continue to be poor for some time.” The adviser continued: “Even the average person will need the added flexibility of income withdrawal as we lose the differential rates for men and women.”

Another said that while flexible drawdown will be “a relatively niche product”, it “does have serious attractions for high(ish) earners in defined benefit schemes, who will easily meet the £20,000 minimum.”

But not all responses were so positive. One adviser said that the changes will make “very little” impact for anyone “apart from the very wealthy.” This view was echoed by another adviser who said flexible drawdown “only applies to the few – options with fixed-term annuities are more important to the majority.”

Effect on the annuity market

An increase in take-up for income drawdown would also have an ­impact on the annuity market. While the Age 75 rule was in place, these products were often criticised for their lack of flexibility, so will we see a demonstrable downturn in take-up of annuities now they are no longer compulsory?

It would seem not – only 13% of respondents said they thought the number of clients purchasing an annuity would decrease to a large extent, though 44% did say they thought the number would fall to a small extent.

However, 14% of those who took part in the survey thought the number of clients purchasing an ­annuity would grow, while 29% of advisers said they thought the number would remain the same (see question one).

When asked to provide reasons why they held these opinions, one adviser said that clients would still annuitise, but would choose to do it later in life. Another said clients would find that the tax charges on death in drawdown would prompt them to purchase an annuity.

It would seem that annuities will continue to play a pivotal role in the retirement plans of the vast ­majority of people. It would also seem that the major change we will see is a shift in types of annuities being used.

One adviser said they were ­increasingly using enhanced ­annuities for their clients, while ­another said they expected fixed-term plans to play an increasingly important role in future. This view is borne out in the responses to another question we posed: where do the main areas of growth currently exist within the annuity market?

The enhanced annuity was a clear winner with 55% of advisers ­choosing this as an option. Fixed-term annuities came in second with 14% of the vote. With inflation rates making front page news, it is perhaps no surprise that 12% of ­advisers said they expected ­inflation-linked annuities to be a growth area, with asset-backed ­annuities being highlighted by 11% of advisers (see question two).

Interestingly, 9% of advisers also highlighted the variable annuity market as a possible growth area, with one adviser saying: “I am sure that there must be many more ways of providing retirement income in more imaginative and flexible ways than are presently available. The ­relaxation of regulation should ­enable this area to thrive.”