In the 2014 Budget announcement, chancellor George Osborne decreed: “Drawdown and Lamborghinis for all!” Except not really, and you can substitute “Nissan” for “Lamborghini” given the size of many DC pension pots.
In any case, major change is afoot. Responding to this change, Fund Strategy sister-magazine Corporate Adviserand The Platforum are working together to enlighten the market on the evolving retirement market.
The first report in a series of Retirement Funding Guides focuses on how advisers are reacting to the new pension flexi-access rules coming into force this April – are they seeing their pension business growing, what kind of drawdown service will they be offering, and what asset allocation and specific investment products will likely sit within this?
Many advisers tell us they are already seeing new pension clients and more still anticipate taking on a greater number of clients. And most advisers we have interviewed expect to use pension wrappers more, versus Isas.
With little lead time from the Budget announcement, providers are racing to get their existing products (particularly pension wrappers) compliant as well as build new drawdown-appropriate investment solutions for the market. Most asset managers and life companies are yet to take new products to the pension drawdown market.
The majority of advisers we spoke to in December could not name any new product that had caught their eye; some lamented the lack of new options. We have seen a trickle of retirement product launches in January – most recently from Schroders – rather than a torrent.
Asking advisers which specific product types they will be recommending as part of advised drawdown, multi-asset comes out on top by some distance – 60 per cent are likely to recommend.
This likely stems from the belief that by diversifying within the fund, there will be less nasty surprises and therefore less capital erosion for the client. However, a number of industry commentators have exposed the flaws in this strategy, and have instead endorsed the concept of “bucketing” retirement portfolios: segmenting so that money needed for short-term income is kept in cash and bonds with short duration, and money for longer-term income is sat in other bonds and equities.
Adviser opinion is liable to change once more provider offerings for retirement go live, and as the debate continues regarding best practice in asset allocation for de-accumulation. Currently 40 per cent are likely to recommend an annuity; I read this as an underestimation of a product well-suited to clients matching a cautious risk profile, and potentially offering a better, more stable retirement income in some cases.
Annuities may well be the comeback kid of 2015 for another reason: the frequently referenced advice gap. Advisers posit that retirement income decision-making is too important and too complex to be left to the less informed, and they do not tend to have much faith in technology-driven non-advised solutions. Yet many advisers do not want to deal with pension pots of £30-40k, i.e. an average-sized pension pot.
So what are those with smaller pension pots to do? Tellingly, the FCA commented in its retirement income market study interim report, “… for people with average-sized pension pots, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies…”
On the flip side, we have canvassed opinion on the products they see presenting significant regulatory risks when deployed in the retirement market. Almost a third of advisers take issue with capital-protected structured products.
Investment trusts also do not receive a lot of love. Those advising on relatively chunky assets are more likely to see a particular product presenting risks – does this mean that the swathe of advisers with lower personal assets under administration are less aware of the challenges ahead of them?
It goes without saying that there’s great opportunity for all parties – product providers, advisers and consumers – to benefit from the pension rule changes. But the risk of poor outcomes is also great, if these groups are not sufficiently clued up on de-accumulation strategies.
For some, freedom at 55 could mean financial heartache later in life. If Robbie Williams continues to make music (I hope he doesn’t), his lyric “I hope I’m old before I die” might have to be revised to “I hope I’m not broke before I’m old before I die.”