What has driven the need for more innovation around pension choices at retirement?
The 2015 Pension Freedom rules gave people far more flexibility about taking their retirement benefits, but also added a lot of complexity too. We’ve gone from a situation where members didn’t have to think too much about retirement — although the
main option, an annuity at 65, wasn’t necessarily their preferred choice, to now where
the choices available mean members have to think and make active decisions about a whole host of issues, from how much income they’ll need, to how long they need their pension funds to last. Most people find this overwhelming, and with financial advice not always chosen by many, we are looking at how we can design product options and strategies that can help guide people through this process.
What could a guided retirement strategy look like?
The guided retirement concept is still in development, but we are hoping to offer it as an option to members from next year. This approach will essentially split members retirement funds into three main pots: a flexible drawdown plan to provide income during the early years of retirement, a smaller fund for unexpected expenditure and a pot to buy a later life annuity, which is likely to kick in at around the age of 80.
This gives members the benefit of a degree of flexibility in the early years of retirement, while also offering the reassurance, via the later life annuity element, that they will not run out of money later in life — regardless of how long they live, or how their investments perform.
We are currently investigating whether the later life annuity can be a deferred annuity.
This approach also addresses issues around cognitive decline. With conventional drawdown people are free to switch to an annuity at a later stage, provided there are sufficient funds left, but some may feel less confident making these decisions in their 80s. This approach has the potential to be a game-changer. It is a relatively simple product, and people like simplicity. But it still leaves them in control of their money when they retire.
Will a guided retirement approach change accumulation investment strategies?
The idea behind the guided retirement approach is to have a ‘to and through’ retirement strategy that aligns the accumulation phase to the decumulation phase, and creates a whole-of-life journey. To get members ready for the decumulation phase their assets will be gradually moved into the appropriate investment strategies towards the end of the accumulation phase, so yes, there will be a change to accumulation investment strategies.
Does guided retirement reduce the need for financial education around pensions?
Definitely not! We see education and engagement as being key to delivering better member outcomes in retirement. Segmentation will remain important when it comes to delivering information on pensions, including details of this new guided approach. Although it is important to provide general awareness of how pensions can be accessed at retirement and the choices available, it’s not as crucial to those just starting out on their long term savings journey. But as people move through their 40s and 50s they start to think about retirement. This is a good opportunity to educate members about retirement options. Their future plans might also affect investment choices made at this stage, so engagement should step up as people approach retirement and have to make important financial decisions about how they take their pension benefits.
This isn’t the end of the journey however. There’s a need for guidance and engagement post-retirement, particularly for members in drawdown or a guided retirement solution. People need to know whether they are taking too little or too much from their drawdown plans, and the impact that can have on their income at a later stage.