In the case of those people approaching retirement or those who have recently retired, the stock market volatility of the last two years has caused the potential for some real financial hardship.
It is at times like this that consumers must be encouraged to use the open market option (‘OMO') so that they review all their options at retirement and find the best retirement income solution.
Interestingly, despite the increased levels of awareness in financial issues, ABI figures show that less than a third of people would shop around for an annuity, opting instead to remain with their existing pension provider. Our analysis of the annuity market discovered that on both standard and enhanced products the difference on the levels of income paid on top quartile and bottom quartile products was in excess of the 20%, meaning that large numbers of people could be missing out on thousands of pounds over the course of their retirement.
The recent creation of the Pension Income Choice Association (PICA) is a step in the right direction and as a member, we will continue to do all that we can to ensure more consumers are aware of the open market option and make their retirement as financially secure as possible.
And never before has this been so crucial as we reach a financial tipping point for pensioners. There are two million fewer people in defined benefit (DB) pension plans than there were in 1995(1), and based on the difference between employer contributions to final salary and defined contribution plans(2), MGM Advantage estimates that £7.01 billion a year less is being paid into their pensions by employers. A further one million people are expected to be moved from DB plans to cheaper alternatives over the next three years.(3)
In addition, MGM Advantage estimates that a man retiring at 65 today can expect to live for 20 years, and his household cost of living could total £745,744(4) over this period. This will only increase as life expectancy expands and conventional annuity rates will fall as a result of this.
Finally, the fact that many people are starting families later on in life, and that children are staying in education for longer, means that the pressure on parents to financially support their children will be greater and could carry on well into their retirement.
And as people are reaching retirement with these increased pressures on their pension savings, they are faced with a continued downward trend in annuity rates. There is no sign of this trend abating, and the proposed introduction of new European rules for insurers (Solvency II) in 2012 could be bad news for those people approaching retirement as it may force insurers to increase the capital they hold. This would impact annuity rates, with further falls generally estimated to be about 20%.
So what can we do to help people out of this financial melting pot? Our research shows that people approach IFAs with three key concerns as they approach retirement. How to best protect their fund from the effects of inflation; how to guarantee a minimum income in retirement and how to vary income levels to meet changing demands throughout retirement.
Like any other period in life, people have varying lifestyle demands in their retirement and, with the average retirement lasting almost 19 years, people need to have the flexibility in terms of the income they receive.
At MGM Advantage, our new annuity will offer customers the ability to adapt their income levels to meet their changing lifestyle needs throughout retirement, and provide a minimum income guarantee. We will offer customers the potential to grow their pension pots during retirement, therefore negating the impact of inflation, and they will have the flexibility to choose where we invest their money over time. Indeed, the customer can benefit from most of the appeal of Drawdown - including death benefits, while also benefitting from belonging to a mortality pool that offers them increased financial benefit the longer they live.
Current developments in the retirement income market, such as enhanced annuities and asset-backed annuities, have given advisers more choice. However, it is crucial that advisers explain to their clients the choices available to them at retirement, and the advantages and disadvantages of each route. This is not just the potential investment risk, but also how best to mitigate the risk of inflation and longevity.
(1) TUC website
(2) MGM Advantage analysis of figures from the TUC, ONS and the Association of Consulting Acturaries
(3) Watson Wyatt
(4) MGM analysis of data from ONS Family Spending Reports and the Consumer Price Index
