Despite all the hype before 6th April 2015 (how can we forget the commentary on pensioners cashing in their pensions and buying Lamborghinis?), we are now starting to see strong themes emerging in the market post pension freedoms. ABI data published in November 2015 reveals that investors have withdrawn £4.7billion since April 2015 and are making sensible choices. We are being told they’re taking small pots as cash and using larger pots to buy retirement income.
There’s also a new generation of drawdown investors. Flexible drawdown now accounts for 60% of the retirement income market. These numbers will rise, as will those bypassing advisers (currently 42% according to the FCA.) Many people with assets in old style pensions will move into modern platform based arrangements to take advantage of the freedoms. It’s no coincidence that advisers report a rise in enquiries about moving defined benefits into flexible defined contribution products.
Investors want the flexibility to cope with changing income needs as they get older, and to keep investing. But the ABI has also reported the first quarter-on-quarter rise in annuity sales in the last 3 years – a trend also identified by the FCA and so it is obvious that investors still value a guaranteed income. There’s been some product innovation, but we’re a long way from a mature market in this space.
The ABI may call this a “peaceful pensions revolution” but the message to the industry from the regulator is clear. Retirement Income remains centre-stage. The FCA launches its Retirement Outcomes Review next summer and CP15/30 gives insight into the key issues. Default investment funds and life styling arrangements will come under scrutiny. Putting people into cash and gilts just before retirement isn’t suitable for the growing numbers rejecting traditional annuities. Throw a secondary annuity market and probe into drawdown charges into the mix and it’s likely to feel anything but peaceful.
So why the focus on retirement? Two reasons:
- Demographics – more people will spend longer in retirement;
- Complexity – unpredictable needs and declining health make it difficult to manage sustainable income levels and investment risk.
For advisers, clients in retirement will dominate client banks and some may need to adapt business models to service this segment. As the market develops, retirement income won’t come from a single wrapper. Advisers with wealthy clients are already well versed in blending different tax wrapper and investment solutions. This principle will extend to the mass market as investors navigate the challenges of securing essential income alongside managing market exposure.
The focus must be income; providers will need to facilitate tax wrapper and investment combinations but crucially, they must get income payments to people efficiently.
The investor challenge will be: take away the complexity of having multiple income sources and give me a single payment when I need it. If that’s the challenge, let’s step up to the plate.