Written by Cecilia Furner, Distribution Director, Legal & General Retail Annuities
To anyone keeping an eye on the news right now, it comes as no surprise to hear that the retirement landscape has changed.
From the decline of “gold-plated” DB pension schemes to the impact of Covid-19, volatile markets and the rising cost of living, there’s no shortage of headlines declaring the brave new world that pensioners and those planning for retirement now face.
With life expectancy on the rise, how we plan for retirement is also evolving, and accounting for a much longer retirement requires careful consideration of the trade-offs between income needs, inheritance goals and care costs.
It must also be considered that retirement is no longer a one-off event, but an evolving phase in people’s lives, unique to the financial situation of each individual. For most clients, a binary approach to income from their pensions pot, drawdown or annuitisation, may be sub-optimal.
Annuities are on the rise
We know that more clients are thinking about annuities, with recent research from Legal & General finding that 990,000 pre-retirees (those aged over 55 and still in work) are considering annuities for the first time. This is undoubtedly due in part to rates being at their highest levels for years, with our analysis finding that annuity rates typically increased by around 40% from 2021 to 2022, and over 60% since 2016. However, another important factor is the security and peace of mind annuities offer clients against the backdrop of volatile markets and rising living costs.
But while they’re growing in popularity, many people don’t fully understand the nuances of how annuities can fit into their retirement plans, so financial advice is essential to ensure the best possible outcomes. Advisers need to help clients understand the full range of options available to them, including products like fixed-term annuities and enhanced annuities, and how they work best as part of a blended approach.
There is growing empirical evidence demonstrating how integrating annuities within a retirement portfolio can deliver better outcomes for retirees. Annuities not only provide a guaranteed income, but they also allow for more flexibility with in a client’s wider portfolio and mitigate riskier investments. Research from Legal & General Investment Management (LGIM) found that partial annuitisation, alongside income drawdown, can increase the prospect of higher levels of income. Increasingly, buying an annuity doesn’t have to be an all-or-nothing decision, with partial annuitisation striking a balance many clients may be more comfortable with.
Advisers must be outcome-focused when walking clients through their individual decumulation journeys – a planning phase that can last decades, with ever-changing key objectives like income, access and legacy that need to be balanced.
Layering and phasing annuities can be used in a portfolio to create a bespoke solution with the right level of certainty and peace of mind for each client. The result is often that this approach allows more flexibility and risk within the rest of the portfolio, thus creating balance. In the current volatile economic environment, many clients will value this underpin, allowing them guaranteed income whilst maintaining flexibility with their drawdown.
Consumer Duty and the impact on the retirement income market
The Financial Conduct Authority’s (FCA) Consumer Duty rules will impact every area of advice. New rules for the avoidance of foreseeable harm will safeguard retail customers and allow them to better pursue their financial objectives.
The FCA is focusing its attention on advice and the decision-making processes both at the point of decumulation and throughout the entire client journey. The regulator is currently conducting a thematic review of the advice consumers are receiving on meeting their income needs in retirement, in light of the government’s Pensions Freedoms reforms. This review will directly inform how the FCA assesses firms’ implementation of Consumer Duty, so in terms of annuities, this highlights the need for advisers to ensure that any planning remains appropriate to the wellbeing of the client.
Whilst there is much evidence of good work being done in respect to Consumer Duty across the sector, the co-ordination of ‘good practice’ among providers and intermediaries is essential to provide consistency and guidance for the wider market.
The launch of the Consumer Duty Alliance earlier this month will help promote good practice and deliver better client outcomes across the industry, and as a founding affiliate of the Alliance, Legal & General will be working closely with its partners to ensure the professional standards are upheld.
Working in partnership with the Financial Vulnerability Taskforce and CDA, Legal & General has also supported the launch of the ‘Consumer Duty and Retirement Income target market guide’, which focusses on what actions advice firms might consider taking with the new Consumer Duty, in light of a changing retirement income landscape and evolving consumer needs.
It’s essential that we coordinate with leading providers, industry bodies, regulators and intermediaries to share good practice and promote better retirement outcomes for clients. In doing so, annuities can become an even more tailored and effective element of many more people’s retirement journeys.
Getting retirement income advice right is more complex than ever, and therefore more critical. As the industry seeks to protect individual consumers and promote better retirement outcomes, intermediaries must keep annuities at the front and centre of their considerations when advising clients on how to ensure a longer, more prosperous retirement.