Eight out of 10 people want a retirement product that offers a guaranteed income for life, yet only a minority of customers are purchasing an annuity, according to new report from Scottish Widows.
Its research found a disconnect between what people say they want from their retirement income, and what products they are actually choosing, strengthening calls for more innovation in the sector. Scottish Widows called for greater retirement product innovations as a result. This call comes amid political discussions as to whether CDC retirement-only options should be rolled out across the pensions market.
The survey also found that 55 per cent of respondents said a predictable income was important for budgeting, yet the majority of people currently select a product where their income is dependent on investment returns.
In its report, ‘Decumulation: Understanding the Needs of the Nation’, Scottish Widows says innovation is needed when it comes to developing retirement income propositions and that additional ways of supporting customers through important decisions will be required.
As well as greater innovation Scottish Widows says there’ll also be a need additional ways to support customers when it comes to making financial decisions around their retirement.
In the report, Scottish Widows outlined three factors which influence people’s retirement choices: ‘control’ (income for life vs flexibility to decide what they spend and when), ‘consistency’ (consistent or variable monthly income), and ‘legacy’ (passing on the pension pot in case of death).
The report reveals that more than two in five respondents (43 per cent) said ‘control’ was their primary decision point. ‘Legacy’ was the second most important factor, with a third (33 per cent) of respondents driven by this, while ‘consistency’ drove almost a quarter (24 per cent) of respondents’ decisions.
To help advisers have better conversations with clients about their retirement income options, Scottish Widows has also launched a new ‘retirement matrix’. This mapping tool plots current and potential retirement products – including annuities, drawdown or investment products – against what people want from their retirement income. This is mapped onto a 3D cube, enabling clients to see whether their needs are being met by the current products available.
Qualitative research to support the new matrix indicates that those with substantial assets outside their pension were less likely to worry about the ‘legacy’ aspect of their pension pot, while focus increased for those whose pension pot was the only potential source of wealth transfer to the next generation.
Scottish Widows head of policy Pete Glancy says: “Auto Enrolment has been a game changer in helping more people boost their pension savings, but the model determining how retirees will access their funds in retirement could use a similar shot in the arm. The options at retirement can be daunting and complex, and people who can’t afford the services of an Independent Financial Adviser may inadvertently make choices which do not meet their needs, and those of their family. At the same time, policymakers are still working through regulatory and legislative changes which will determine what is and isn’t possible in the future.
“People are telling us loud and clear what they want, but not everything they want is currently available, or indeed permitted. Continued collaboration between the pensions industry and policymakers is required to determine what is needed and then deliver it.
“This research is another illustration of why an independent Long-Term Savings Commission, that considers UK financial resilience in the round, is necessary to deliver the future we want for Britain in retirement.”
The new report also explores how people would like to receive financial support. The FCA has recently floated the idea of using ‘choice architecture’ more widely in customer conversations. Scottish Widows says this looks to be a popular proposal, with 38 per cent of respondents expressing a preference for a service where the pension provider offers them a specific outcome, after taking them through a series of questions.
Less popular options included full advice, (14 per cent), simplified advice (14 per cent), guidance (17 per cent), and ‘none of these’ (18 per cent). Attitudes towards the five proposals largely remained consistent across pot sizes, albeit with a preference for full advice from respondents with the largest pots over £300k.
Not surprisingly, people with more than one pension pot tended to want support which related to all of their pots collectively. 81 per cent of people with three or more pots wanted support which considered all of their pots. These results suggest that pensions dashboards will have an important role to play in managing people retirement options.