Posted In: Wealth Management Administration
After the dramatic fall post-pension freedoms, UK demand for annuities is showing signs of recovery, with some providers reporting increased sales. David Simpson, Head of EMEA, looks at the need for innovation to meet customer demand for guaranteed income alongside flexibility and access.
The UK population is getting older, with the Office of National Statistics projecting that by 2036, 24% of the population will be aged 65 and over, up from 18% now. At the same time, the proportion of workers is predicted to shrink, placing increasing pressure on government funding for health and elderly care services and pension benefits.
The need to provide for ourselves financially in later life has never been greater.
Before 2015, for most people funding retirement meant buying an annuity and receiving a guaranteed income for life. Then pension freedoms legislation introduced greater flexibility and choice around taking a pension, leading to a fall in the popularity of annuities. According to the Financial Conduct Authority (FCA), twice as many people now choose income drawdown products compared to annuities.
Despite the complex, and often irreversible, nature of these retirement decisions, a third of drawdown sales are made without speaking to a regulated financial adviser. Of those in non-advised drawdown, a third hold their whole pension fund in cash. This suggests that many people are inadvertently missing out on potentially higher income in later life and the long-term financial security that annuities provide.
To improve retirement outcomes, the FCA recently announced that from July 2020 drawdown providers must offer non-advised customers ‘investment pathways’ to help guide them through the decisions they need to make. Customers entering drawdown, or transferring drawdown assets, will be asked to identify what they plan to do with their money in the next five years:
Under the new rules, providers must offer one solution for each option and make sure that any customers investing largely in cash have taken an active decision to do so.
While helping consumers improve their finances in retirement is to be welcomed, this single option approach fails to fully reflect the two key features that, according to the FCA’s own research, consumers look for in their personal pensions. Almost a third want a guaranteed income, while a fifth want to be able to access their pension flexibly.
Clearly annuities remain an important consideration in retirement income planning and it is disappointing that the FCA’s new pathways legislation does not do more to encourage product innovation in this area. We believe providers who can offer guaranteed income as both a standalone and combined solution within a retirement income plan are ideally placed to meet consumer demand for financial security alongside flexibility and access.
We’ve introduced new functionality to Composer to help clients offer a wider range of annuity products and benefits, while making the administration and reporting around legacy products more efficient and cost effective.
To find out more about how we can support your retirement proposition, please contact our team.