Billy Burrows: What will good advice look like post-Budget?

Following the Budget announcements, I am trying to get my mind around the potential disconnect between some of the future client behaviour we might see and what will constitute good advice from a specialist retirement adviser.

Take the concepts of tax-efficient income planning and sustainable income. A competent adviser would talk to their clients about both these concepts and point out some obvious but very important planning matters.

For example, it does not normally make sense to take money out of a tax-privileged environment and pay significant amounts of tax on income or capital that is not required. Also, a good adviser would discuss the prudent level of income that should be taken from a drawdown arrangement, that is, what is a sustainable level of income.

Clearly, some people will have a need for capital and therefore in some cases it might make sense to pay a large amount of tax to withdraw what they want but for many people it will still be sensible to use their pension to pay a regular income rather than  take a lump sum. In the US, where many more middle-income people take systematic withdrawals, advisers spend a lot of time designing investment portfolios suitable for income withdrawals of about 4 or 5 per cent of the capital value. This is a far cry from 150 per cent of GAD.

An income is sustainable when it can be maintained at a certain rate or level and there are two things to consider – maintaining the absolute level and maintaining the real value.

A guaranteed, level annuity will maintain the absolute level of income but over time the spending power (real value) of this annuity will be reduce as inflation takes effect. An investment-linked annuity or pension drawdown policy does not necessarily produce an income that is maintained at the same level because it will rise or fall depending on future investment returns and other factors. One of the objectives of these policies is to provide an income sustainable in real terms but there is obviously the risk that the income could be lower, not higher in the future.

The hope is that with near total flexibility at retirement, clients will want to discuss their options before rushing off to do something that might not be in their best interests. Annuities will continue to be an important option for those who are looking for both tax-efficient income and sustainable income.

The Government plans free and impartial face-to-face guidance on the range of options available to people at retirement but many are sceptical of this because it is simply not practical or affordable.

There will clearly be need for specialist retirement consultants to explain and discuss complex options so the industry needs to get their heads together to work out how this will be done.

Billy Burrows is head of business development at Annuity Line

Annuity rates flat in Q1

• Average annuity rates increased by less than 1% in the first quarter of 2014
• Difference between the best and worst annuity rates is 12% for the standard market and 7% for the enhanced market
• There is a 30% difference between the top quartile enhanced rate and bottom quartile standard rate

The latest MGM Advantage Annuity Index1 reveals average annuity rates increased by 0.83% in the first quarter of the year. The data reveals two distinct markets, with a 30% difference between the top enhanced rates and bottom standard rates. The gap between rates also evidences a two-tier market, with the difference between the best and worst enhanced rates at 7%, compared to 12% in the standard market.

Following the strong rise in annuity rates throughout last year, rates were flat in the first quarter of 2014. This is in part due to gilt yields, as well as the returns available on corporate bonds.

Given the uncertainty in the market at present, it is worth remembering that customers who are looking to secure a sustainable income for life face the same decisions as they did before the Budget, and are unlikely to get a different outcome now to post 2015. The cost of delay needs to be considered, as does the potential for annuity rates to go down in the future.

Considering your options at-retirement involves some complex decisions, with the recent changes making this arguably even more difficult. People looking to navigate their way through and create a sustainable income should seek professional financial advice.

It is clear the Budget will have an impact on rates going forward, although it is too early to call how this will play out. We are already seeing reduced demand as some people are postponing decisions until April 2015. This could drive annuity rates down. However, the competitive open market providers are likely to compete even more aggressively for business which might lead to tactical pricing decisions and improved rates for enhanced customers.

1.Annuity rates are based on analysis of data supplied by Investment Life and Pensions Moneyfacts to MGM Advantage (31 March 2014). The analysis looked at level annuities without a guarantee and income levels are based on a pension pot of £50,000 and a retirement age of 65. All rates are on a gender neutral basis. To create total retirement income figures the Index multiplied annual annuity income by 21 years in the case of men and 24 years in the case of women (at age 65). Enhanced rate figures are from a sample of smoker rates and enhanced rates based on health conditions. The Index bases its life expectancy figures on Office of National Statistics figures, using the cohort tables at age 65.

Source: MGM Advantage analysis of annuity rates from Investment Life and Pensions Moneyfacts. The average annuity is calculated from average standard and average enhanced rates.

Long life, not according to the wife

• Males approaching retirement age¹ underestimate how long they will live by an average of 5 years
• Females sell short their life expectancy even further by an average of 10 years
• 79% of males approaching retirement age underestimate their likely longevity compared to 85% of females
• 15% of women don’t expect to live past age 70, compared to 16% of men
• Just over a third of 55-64-year-olds can’t see themselves living beyond age 75

New research¹ shows that 82% of people approaching retirement age are underestimating how long they are likely to live. Men aged 55-64 estimated their average life expectancy to be 81 years old and women estimated it to be 79. Official figures² show that the average 55-64 year-old is expected to live until 86 if male and 89 if female, meaning that men could be in retirement five years longer than expected and women for ten.

It is important that people have a realistic expectation as to how long they are likely to live, so that they can make adequate provision for retirement. The chancellor’s Budget changed the pensions’ landscape forever allowing people more freedom and choice with their pensions. We fully support the idea that individuals have more say over how they access and spend their pension savings.

With increased choice comes the risk that individuals may live longer than they anticipated meaning they may outlive their retirement savings. If you don’t plan properly then the funds built up could be exhausted in later life. This could lead to a decline in living standards and may come at the exact point you need regular income for things such as care fees.

Many retirees are naturally conservative so while increased flexibility may have some appeal, they will also want to make sure they have long-term guaranteed income. The reality is simple, there is no other product in the market that offers such a high rate of return for life than an annuity.

1. Source: MGM Advantage research among 2028 UK adults, 314 of which were aged 55-64, conducted by Research Plus Ltd, fieldwork 17-22 October 2013. Respondents were asked “Being as realistic as you can, approximately how old do you think you’ll live until?”

2. Source: MGM Advantage analysis of ONS cohort estimates of life expectancy - 2012.

28% of the over 55s not comfortable taking on the risk of managing their pension savings

New research¹ from MGM Advantage, the retirement income specialist, shows the risk people are willing to take managing their own pension savings. 28% of the over 55s said they were not comfortable taking on the risk of managing their own pensions to provide a suitable income throughout retirement. The research shows that only 26% of adults aged 55 and over are very comfortable managing their own pension savings, 41% are somewhat comfortable, while 5% don’t know.

A key concern for adults aged 55 and over who aren’t comfortable managing their own pension savings is the thought of running out of money. Two-thirds (69%) said running out of money in retirement is a cause for concern, while making poor choices when investing and the consequences of this were an issue for 64% of adults in this age group. One in two said budgeting for the whole of retirement is a reason to be concerned, as is assessing how long they would live and therefore need to plan for.

With all the hubbub around the Budget, it is easy to forget people’s appetite for loss and attitude to risk. From this research we can see although many people are comfortable managing their own money to provide a suitable income throughout retirement, almost one in three are not.

People approaching retirement will have to make some crucial decisions about how they can maximise the pension savings they have. With the welcome increased choice and flexibility comes more complexity. This is where receiving financial advice will be key, ensuring there is a balance between people understanding the risks to ensure their savings last their lifetime, without resorting to undue conservatism.

Source: All figures, unless otherwise stated, are from YouGov Plc.  Total sample size was 2470 UK adults aged 18+ of which 908 were adults aged 55 and over. Fieldwork was undertaken between 24th to 25th March 2014.  The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).