Scrapping of compulsory annuities purchasing and offering individuals more pensions freedoms is without question a positive thing. Annuity rates are linked to the 15 year gilt yield, which has been falling steadily over the past couple of decades. This has meant those forced to buy an annuity at retirement and fix their pension income having getting steadily less bang for their buck.
Add to that those approaching retirement have seen two massive market falls in the past 15 years, and it makes sense to be allow those saving for retirement the opportunity to recoup some of those losses by leaving at least part of their pension pot invested for longer.
Some naysayers have been calling into question the sense of allowing adults access to their own cash. While it may be tempting to splurge your pension lumpsum, Morningstar research from Australia where there is a similar pension scheme in place suggests people are not stupid with this kind of freedom. Granted a little money initially goes on holidays, home improvements and helping children and grand-children get on the housing ladder, but the majority is used for long term living plans. After all – if you have spent decades diligently accruing funds for retirement, you have learned the habit of sensible saving.
The challenge will not be convincing individuals to hold onto their cash; it will be coming up with effective retirement saving solutions that do not crumble when thousands of individuals want access to 25% of their pension pot overnight.
The industry does indeed now face a decade of change – as suggested by pensions minister Steve Webb last week. It needs to come up with innovative new products that can continue to grow pensioners’ capital in retirement, offer the option of ongoing income and cope with lump sums being withdrawn for those that wish to.
There will be no longer be one strategy that fits all perfectly, which was the initial idea behind a default pension fund. Instead the Government, Financial Conduct Authority and pension providers have to educate individuals to the broad spectrum of options available to individuals and ensure that each retiree makes the right choice for them.
As Morningstar global chief investment officer Daniel Needham adds: “Each person has unique needs and preferences, and one size rarely fits all.
“In a well-balanced retirement portfolios lifetime annuities and lifetime guaranteed income products can play a role, just not the only role. Combining guaranteed products and traditional assets into long-term retirement portfolios can allow individuals balance the need for lifetime inflation protected income and the ability access one’s savings for unexpected changes in people’s circumstances.”
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