Seismic changes ahead for at-retirement

Fiona Murphy rounds up 2011’s at-retirement issues in the results of the Retirement Planner inquiry

This year has seen seismic shifts in the retirement landscape. The Age 75 rule was abolished, flexible drawdown was introduced and there was much debate about the introduction of the £140 per week State Pension. However, a number of changes have suffered teething problems as a result of difficult market forces, presenting great challenges that will continue into the next year.

This Retirement Planner Inquiry asks advisers to look back at how the retirement market has developed. We want to know what challenges they have faced and the legacy of these changes. As with previous Inquiries, we sent out a questionnaire to our readers, with 74 advisers taking part in the survey. We asked first whether these respondents advised on retirement planning. Fifty-three percent confirmed they did with the remainder screened out.

Legislative changes

We then wanted to assess how legislative changes affected advisers. We asked, do you think retirement reform, such as the end of the ‘Age 75' rule and the introduction of ‘flexible drawdown' have gone far enough to meet your clients' needs? The majority of advisers sampled (75%) agreed the changes had gone far enough. But a third disagreed. We asked them to explain why.

One adviser succinctly described the new system as "great" and that "flexible drawdown has opened-up new opportunities for clients." However, this was against a backdrop of historically low GAD rates, historically low annuity rates and a "general distrust that pensions will actually do what was promised."

Others focused on the downsides, saying flexible drawdown does not suit a lot of clients, while others may own substantial assets but still do not meet the MIR. Others felt the changes were not flexible enough. One participant accused HMRC of thwarting development by focusing on tax relief, while accusing the government of "defrauding people" by not guaranteeing gilt rates.

To follow up we asked: Do you expect to see growth in the flexible drawdown market over the coming two years? The results strongly indicated growth: 50% expected a slight increase yet 36% expected a lot of growth. Only 14% didn't expect any increase.

So, we asked them how they were planning to utilise flexible drawdown as part of a clients' retirement planning strategy? Interestingly, a number of respondents will not as their clients are ineligible. However, one used it, "where a GP has a significant NHS and state pension underpinning their income, or for another client who had enough income to cover the MIR and significant personal wealth that an additional income was not needed."

Additionally, a few would use it in client discussions - "We introduce it to all eligible and potentially eligible clients, along with other propositions new to market, so they understand the traditional annuity is not the only route". Others would put it in their advisory tool-kit for IHT planning or the ability to free up pension funds for other investments.

Annuities

Next, our spotlight shone on the annuity market, asking advisers to give multiple responses on where they expect growth. A whopping 85% said enhanced/impaired annuities. The remainder divided their responses between fixed term annuities (45%) and investment linked annuities (42%).

Aside from the products, we wanted to know strategy. Are advisers utilising a "portfolio" approach to their clients' retirement planning? The majority (87%) agreed they were, with one revealing "The wrap account will take over and any client with £100K in the fund will use drawdown." One disagreed saying: "[Clients] would prefer straight forward retirement plans to enjoy their life."

Finally, we asked our advisers an open question to gauge what they think the future holds for the market: "What do you see as the key challenges facing advisers operating in the retirement market over the coming five years?" And, true to form, we received a fascinating range of responses.

Annuities are widely causing concern with one warning of "client disillusionment with annuity rates and inflexibility leading to a rejection of pension products."

In agreement, another explained: "Clients are using ISAs, buy-to-lets and many other forms of retirement planning instead", bringing attention to the fact, many people are moving away from well-trodden, more traditional paths. And as expected, RDR was not far from advisers' minds with the issues of quantifying advice or the fear people would move away from seeking advice altogether.

Others described government intervention as problematic for the adviser, with answers ranging from auto-enrolment to "HMRC and government policy that has little understanding of clients' needs."

Others were concerned about how effective pensions would be in guaranteeing reliable incomes and capital preservation, while the lack of a savings culture continually rears its head.

Challenges ahead
As we move into 2012, we foresee a challenging year for advisers, whose arsenal is growing with the range of market options. While currently flexible drawdown is unpopular, we wonder whether this will be the same in coming years or whether it will become de rigueur for the new breed of retirees, who will have larger pots than their predecessors.

We also wonder how advisers will adapt to auto-enrolment and RDR. And, if we see no improvement in annuity and gilt markets, some of the trends we have seen this year, will likely be magnified into 2012 and beyond. But whatever hurdles the market and new legislation may present, the onus is on the adviser to ensure their clients are ready for retirement.