Blog by Claire Altman, Managing Director, Individual RetirementÂ
In this article, I look at how the Consumer Duty could impact the retirement income market.
While the Duty has launched, its mission has only just begun. And as the regulator sharpens its focus on how advisers work to achieve good outcomes for their clients, is now the time for partial or phased annuity purchases to play a key role in your retirement income planning?
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Advisers have a lot to contend with right now.
Not only has the regulatory environment shifted, but the wider social and economic picture has been significantly transformed – and it’s all happened within a relatively short period of time.
On the face of it, the driving principle behind the Consumer Duty doesn’t feel particularly game changing. Surely all advisers will aim to deliver a good outcome for their clients and keep their best interests at heart? But when you layer in the FCA’s cross-cutting rules, things start to get a lot more complicated – especially in the current climate.
In particular, advisers need to demonstrate how they’ve helped their clients achieve their financial objectives, while also avoiding foreseeable harm. If you take a moment to consider the risks that might hinder these objectives, such as market volatility, interest rate fluctuations and rising life expectancy, you quickly begin to see how there’s a lot more complexity for advisers to juggle.
A new era for retirement income planning
The freedom and flexibility of drawdown will always be an attractive option for those who feel ready to access their pension savings. But, at the same time, 9 in 10 people say guaranteed income is important to them – while more than half (55%) worry their retirement finances won’t last their full retirement lifetime.1
It’s therefore become increasingly important to help clients understand that their retirement income doesn’t have to be a binary choice between drawdown and annuities. Indeed, by combining the two, there’s room to enjoy the benefits of both worlds. A regular income that’s guaranteed for life, and a pot of savings that can hopefully enjoy future investment growth, but can also be accessed whenever it’s needed.
Finding the right balance between certainty and flexibility
As with any income strategy, a partial annuity purchase will need to be carefully planned and tailored to match the unique needs of each client.
A good starting point would be understanding what the essential outgoings look like – and this will again differ from individual to individual. Some people will want to know that, no matter what, their household bills will be covered. Others may want help in securing a certain lifestyle, and this could mean protecting their ability to pay for a gym membership or TV subscription.
Of course, you will want to factor in any regular incomings – and this could include State Pension payments. You can then start to build a clear picture of the income each client needs – and how much of their pension savings will be needed to secure it.
You can also consider whether any inflation proofing would be of benefit to the individual, to help them retain the buying power of their ongoing annuity payments.
Secure the future, one annuity at a time
It’s important to remember that buying an annuity doesn’t have to be a one and done decision. And a phased approach could be more advantageous to your client – especially as the rates you’ll be able to secure will improve as they get older. Not only that, but it can also help to gradually reduce your client’s exposure to interest rate fluctuations, market volatility and longevity risks.
Again, this would need careful planning, ongoing reviews and a close understanding of your client’s evolving needs. While they may want the comfort of financial certainty, they may also want to preserve liquidity and flexibility with some of their remaining pension savings. And it’s down to you to understand where the dial might sit at any given time – and then when might be the optimal moment to make a transition from one to the other.
Time to make a change?
What’s clear is that the world is rapidly changing. Not only in terms of consumer needs, but the FCA’s thematic review of retirement income advice is also coming down the tracks. And this, in the regulator’s own words, ‘will be an important indicator of how firms are implementing the Consumer Duty.’
Considering a phased or partial annuity strategy as part of your client’s retirement income mix could be a positive step in helping your firm to get ready for both.
Find out how the Standard Life Pension Annuity could help your clients enjoy a guaranteed income for life.
Money invested is at risk.
1Standard Life, Retirement Voice 2023
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