Pension consultants are already talking to clients about changing investment strategy targets to accommodate the more complex choices soon to be available to retirees.
Target date fund providers are assessing what the changes mean so they can adjust their asset allocation to make them more suitable for the populations they serve.
But experts say so much remains unknown, it is hard to predict what investors should be targeting. Yet with just 12 months until the new rules take effect, decisions about asset allocation strategy need to be made as a matter of urgency.
Nest says it needs to take stock of the situation before making any changes to its default offering.
LCP partner Andy Cheseldine says: “We are already talking to a number of clients about the changes. AE legislation requires a default, but what ends game should we assume – buying an annuity, drawdown or cash lump sum? Each would have a different shape over the 10 to 15 years to selected retirement date.
“That selected retirement date, or rather date when you take some or all benefits, is going to be difficult to establish as well.
“Finally, we’re not clear on what the options actually are apart from annuity, drawdown or cash lump sum.
Buying an annuity is relatively simple.
If you take flexible drawdown, you cannot contribute any further. Will this still apply? If so, when you take out £100k to help your son buy a house, you will then have to stop contributions. If not, how will they stop gaming of the system?
Cash lump sum will again probably means no further contributions. If so, the plumber who takes benefits at age 57 might be quite miffed when he starts making further contributions and gets a massive tax bill.”
AllianceBernstein managing director, pensions strategy group Tim Banks says: “The changes to the annuity market announced in the Budget will clearly impact the way members will think about and save for their DC pension.
“The proposed reforms also highlight the need for flexibility in the run-up to retirement. The announced changes underline the fact that Lifestyle strategies, which focus on a “cliff edge” annuitisation, don’t fit the modern working environment. We believe the presumption that individuals will retire on a specific day, set many years in advance, and immediately annuitise on retirement, will become a redundant concept.
“The target date funds’ investment strategy is aimed at a wider retirement window, recognising that members may prefer to keep their funds invested while they decide what to do with their funds. As a result, we expect target date funds to continue increasing in popularity as the default strategy of choice. Our target date fund strategies are constantly reviewed and can seamlessly adapt to regulatory changes.”
Nest chief executive Tim Jones says: “The changes being proposed by the Treasury are significant and we want to give them the careful consideration they deserve. It’s too early to say how they might impact our approach. Our over-riding concern is to act in our members’ best interests – that will be the lens through which we will consider any changes that may be needed.”
