In this analysis for IFA Magazine, Tony Hicks, Head of Sales, Copia Capital, tells us why he believes that innovation is key if advisers are to deliver flexible retirement plans that put clients’ needs first but also satisfy the requirements of the regulator
In recent months, retirement income advice has found itself in the spotlight. The FCA’s thematic review of the area highlighted the importance of sustainable income for many consumers at retirement. While it reported general good practice, the review also flagged that some firms were not fully taking into account the different needs of clients in decumulation as opposed to accumulation when overseeing their investments.
The 2015 pension freedoms have added confusion and complexity to retirement decisions. While aiming to give retirees more control over the pot of money they built up when working, they have, in fact, increased the potential for the unadvised to end up with a poor outcome. The greater flexibility afforded by the new rules can too easily result in consumers drawing down too much money too soon, and potentially running out of funds in later years.
To the credit of advisers and planners, they work hard to help their clients approaching and entering retirement understand the perils of sequencing risk alongside increased longevity. What they’re not universally doing, according to the FCA, is shifting the focus sufficiently from capital growth to sustainability of income.
Until a couple of years ago, the decade-long period of extremely low interest rates coupled with pension freedoms and generally upward movements in stock markets witnessed a huge decline in annuities being recommended for retirees. Even though private sector defined benefit pensions were being largely superseded by defined contribution schemes, low interest rates and strong investment markets made guaranteed income less attractive when creating a financial plan to achieve a comfortable income in retirement.
The picture has now become radically different. Volatility in markets and the simultaneous poor performance of both equities and bonds, alongside inflationary pressures and higher interest rates, has renewed interest in the concept of providing retirees with some form of guaranteed income.
In addition, the shape of retirement is changing. Recent research by professional services company WTW (formerly Willis Towers Watson) found that almost half of workers aged 50+ either wish to phase into retirement (32%) or have already done this (17%)[i]. More people want a gradual transition to stopping working, rather than abruptly bowing out, by stepping down the hours or responsibilities as they approach retirement. This suggests that people are likely to want to access their pensions in different ways at different times, adding to the complexity of retirement decisions and underlining the need for flexibility within the financial plan as clients’ needs change.
Against this backdrop, and with the greater emphasis the regulator is placing on the need for advisers to provide good outcomes for clients in retirement, we are seeing firms reconsider their approach to decumulation. A survey during the joint Wealthtime and Copia Rethinking Retirement roadshow earlier this year found that 75% of advice firms are planning to review their retirement proposition, with only 2% confident that they did not need to make any changes[ii].
While annuities are now being revisited within the advice process owing to the better rates offered, alternative strategies that deliver sustainable income but also allow flexibility are growing in demand. The Wealthtime platform saw sales of Just Group’s Secure Lifetime Income solution grow by 400% in 2023, with the value of sales increasing nine-fold in that period. At the end of August 2024, the number of purchases was already on a par with the whole of 2023, and the average value of sales had grown by 15%.
Secure Lifetime Income is growing in popularity with advisers thanks to its ability to address both sequence and longevity risks, whilst also giving total flexibility in how the income it generates can be used for life.
Increasingly, advisers are considering using guaranteed income-producing assets as part of a diversified investment portfolio sitting within a SIPP. These blended solutions help offer some protection against the specific risks faced in retirement, as well as flexibility over the income to be paid out in full or in part, with the remaining amount left as cash or reinvested, and the potential for capital growth within the invested portfolio.
These solutions won’t be the right choice for everyone, but having more investment options that meet different objectives, including delivering a sustainable long-term income, help improve the financial outcomes for those in later life. The industry needs to continue to innovate in the retirement space to ensure that advisers can more easily create flexible retirement plans that fit the different, and evolving, needs and expectations of individual clients, as well as the requirements of the regulator.
[i] https://www.financialplanningtoday.co.uk/news/half-of-workers-planning-phased-retirement
[ii] [ii] https://copia-capital.co.uk/wp-content/uploads/2024/11/Rethinking-retirement-roadshow-poll-result-press-release.pdf
