IPE Views: Freedom, choice and rewriting later life
JP Morgan’s Benjie Fraser calls for greater flexibility in retirement planning solutions
There was a film made in the 1980s called Cocoon about a group of elderly people – in today’s parlance, we would describe them as ‘silver surfers’ – who are rejuvenated by aliens. The changes to the UK pensions landscape in 2014 heralded a similar extra-terrestrial experience for many in and outside the industry.
Defined contribution pension holders, from April, will have previously unheard-of freedom in how they can choose to use their accumulated pension funds, from age 55 onwards – as well as the ability to pass on unused pension funds on death, free of tax. The UK government points to the beneficial impact these changes have already had on people’s pension intentions. Given the modest size of the average pension pot, how will these changes affect how people make financial decisions?
The impact of the changes on the UK annuity market is already evident. Yet, given the unique ability of annuities to deliver a guaranteed income, many people believe they must continue to be promoted as a core element of the retirement income mix. The key to optimising retirement income, some believe, is not to walk away from traditional annuities but to encourage savers to exercise an open market option and to drive greater competition among providers. In a nutshell, many retirees simply want to replace their regular wage. But to do so without an annuity offers a different set of challenges.
Pensions and investments are only one aspect of the retirement challenge. Many people are keen to explore how other strands of well-being can be integrated into financial planning for later life. Old-age care provision, for example, is seen as fundamental to any coherent strategy for well-being in retirement. As a result of such factors, will a broad consensus emerge that endorses a full-blown national savings strategy? And, as is already practised in countries like New Zealand, will an independent figure emerge who sits in or alongside the Cabinet as a Retirement Commissioner?
Given that the guidance guarantee steers clear of product recommendation, many consumers will still need to seek out regulated advice. Innovation in multichannel, at-retirement advice is seen as one of the most exciting developments that could come out of the new pension freedoms.
At the same time, encouraging the mass market to become closely engaged with its retirement planning brings a new set of challenges. If the new pension freedoms are to be used effectively, both guidance and advice will need to be delivered actively to the consumer, both before and throughout retirement.
As the characters in Cocoon found out, the nature of later life can change in surprising and positive ways. The percentage of over 65 year olds participating in the UK workforce has approximately doubled over the past decade, and earned income could be a key source of improved income for older age groups in the future. But work needs to continue to narrow the disparity in wealth levels between the UK’s richest and poorest retirement cohorts.
Notwithstanding, greater life expectancy and longer working lives mean retirement planning solutions need to be increasingly flexible and capable of working around the different needs of the individual. For this version of Cocoon to end well, the industry needs to ensure those on more modest incomes receive a similar level of flexibility to those already taken care of in the workplace.
Benjie Fraser is global pensions executive for Investor Services at JP Morgan