Retirement Nation 2012

Against a backdrop of people not only living longer but also having higher expectations of what retirement means to them, it’s crucial we continue to adapt and innovate to provide our customers with financial solutions that suit their needs.

To help do that effectively, every year we commission extensive research with the older generation. We do so because it provides a welcome opportunity to really listen to people, to gather invaluable food for thought and to consider how we – and others – might take things forward.

As we see the world around us continuing to change, taking the time out to research keeps us on our toes. We hear how people feel about their retirement, the society they live in and the implications of their financial position.

Covering the whole retirement picture, you’ll find challenging thoughts and at least a glimpse of you or your future self in here somewhere, alongside some surprising facts and figures.

It might even help you to think differently about retirement.

We hope you enjoy this year’s report, please do let us know.

Retirement Nation 2012 report

Retail Investment and Retirement Solutions report

You could do a lot worse than get yourself a copy of the Retail Investment and Retirement Solutions report from Clear Path Analysis.

Legislation changes, particularly the Retail Distribution Review (RDR), National Employment Savings Trust (NEST) and Solvency II, in addition to the current economic market turbulence and future uncertainty are altering investors, advisors and product providers’ attitude and approach to the market place. This reinforces the need to stay abreast of the ever-changing outlook and ensure these changes create opportunities, not challenges.

‘Retail Investment & Retirement Solutions 2012’, is the second report in its series which looks at the evolution of the retail investment and retirement solutions sector and the preparation considerations as we draw nearer to the enforcement of regulatory changes.

Key topics:

• Adapting your business model and refining your fee structure for an RDR world
• Examining the impact of other regulations including NEST and Solvency II on the retail
investment and retirement solutions market place
• Considering the merits and suitability of certain retail investment products
• Evaluating methods of achieving income in a low interest rate environment and protecting portfolios against inflationary changes
• Evaluating the developments in the retirement solutions sector and which solutions to consider

The effect of gender neutral pricing

The next phase of the long running saga introducing gender neutral annuity rates is fast approaching. But the position is far from certain with many complexities sure to exist after the changes take place. All of which means there are many issues for advisers to take into account when advising clients both before and after 21 December 2012.

While many may disagree with the European Court of Justice (ECJ) decision, the headline change to treat men and women the same sounds relatively straightforward. But, as with all pension changes, things are more complex than they first appear. This change will affect different contracts in different ways, and cause confusion for customers.

Standard annuities

Rather than having different rates for males and females, standard annuities will have one gender neutral rate from 21 December 2012. This is likely to mean male rates fall 3% to 4% and female rates edge up slightly by 1% or 2%. Therefore male clients wanting to buy an annuity may believe it is sensible to do it before December. However buying an annuity solely because of the gender changes may not be the right decision. Rates could, after all, spike up in future due to gilt yield rises or competitive pricing.

Somewhat bizarrely, standard annuities bought by those in occupational pension schemes (OPS) are not affected by this ruling. As the Treasury has chosen not to ‘gold plate' the EU legislation to incorporate OPS, it appears this is a position we will have to live with - at least until a further case is taken to the ECJ. Advisers will have to take this into account as part of their advice process after 21 December. For example, a female in an OPS may benefit by transferring to a personal pension before buying an annuity as they will move to gender neutral rates.

Enhanced annuities

Underwritten annuities may not be affected to such a degree as standard annuities. This is because the risk assessment element of pricing takes into account a whole range of factors - such as health, lifestyle, occupation and postcode - not just gender. So while there may be some tweaks to pricing, rates may not move across the board in the same manner.

Income drawdown

Currently there are different Government Actuary Department (GAD) tables for male and female drawdown customers, but this would breach the new rules. This put HM Revenue and Customs in an awkward position as it needed to give providers new GAD tables in sufficient time for system changes to take place. However GAD rates are based on market annuity rates and we don't know what gender neutral rates will be until after 21 December - and realistically it will probably be a few months later until rates settle down.

So, from 21 December everyone will use what are currently the male GAD tables, which is a pragmatic solution. This means females who take out new drawdown contracts from 21 December will be able to take a higher income than would otherwise have been the case. For drawdown arrangements already in place a similar increase may kick in at the next review or an earlier date if there is some other change which means income needs to be re-calculated (such as additional funds being designated to drawdown). The extra income available depends on age but it is approximately 4% more for a 60-year-old and 8% more for a 75-year-old. There is no change for males.

HMRC will review the situation once it becomes clear how the gender changes are affecting market annuity rates. As this is likely to be a temporary solution, advisers may want to provoke a drawdown review for their female clients to lock in a new higher income for the following three years. However, as many other factors such as fund value and gilt yield affect this calculation, care needs to be taken. In some cases income may fall despite the male GAD rate being used.

Andrew Tully, Pensions Technical  Director

(First appeared IFAonline.co.uk 25th Sept 2012)

RDR Toolkit Modules

MGM Advantage has produced a series of bite-sized modules to add to the RDR Toolkit, covering areas such as barriers to paying fees, overcoming objections, segmenting your client bank and more. Each module will be published on www.mgmadviser.com/rdr over the coming weeks.

Module 1: The effects of RDR on those advising individual clients on annuity and drawdown products.

Coming next...Module 2: Developing an advice proposition for retirement clients

Essential RDR Toolkit

The Retail Distribution Review (RDR) that comes into force on 1 January 2013 gives you the opportunity to reposition your business with prospective clients.

MGM Advantage has pulled together a toolkit to help you market your business, particularly to clients at the point of retirement. Including sales aids, case studies and a customer brochure, the toolkit spells out to clients why it is essential to take financial advice at retirement.

Commissioned jointly by MGM Advantage, Just Retirement, LV= the programme has been produced by a team of industry specialists each with complementary skills and practical experience of building a business and advising clients.

You can browse the toolkit contents on mgmadviser.com/rdr and order your free toolkits online.

Be quick while stocks last!

Clients thinking of retiring abroad?

Retiring abroad is a dream for many people.  The thought of an easier pace of living, better weather and potentially cheaper property than the UK can prove a strong draw.  But without the right planning and advice you can quickly get caught out by the local tax laws.  And that is before you even look at your pension and other financial arrangements.”

 Here’s some Top tips to pass on to your clients who may consider retiring abroad:

1. Get an estimate of your state pension herehttp://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008
2. Seek independent financial advice (obviously)
3. Ask HM Revenue and Customs for information about any UK tax liability you may have even though you are living overseas
4. Check what reciprocal agreements are in place with the destination country regarding your UK state pension
5. Find out about your welfare rights while abroad
6. Check the cost of healthcare in the country you are thinking of moving to
7. If you decide to keep your property in the UK you will need to let your mortgage provider and insurance company know if it will be rented or remain empty
8. Do your homework on the cost of living in the country you want to move to
9. Notify utility companies, financial institutions and your local council when you are leaving
10. Contact the electoral register, and arrange for mail forwarding via the Post Office

 Check out the Retirement blog on: http://www.mgmadvantage.co.uk/blog/retiring-abroad-thinking-of-retiring-abroad/

Annuities and drawdown

There has never been a more daunting time to be considering retirement.  The financial markets are in a constant state of flux.  Inflation, although seeing recent falls, will come under pressure with the US drought potentially causing food price spikes.  Annuity rates are at an all time low, with the latest findings from the MGM Advantage Annuity Index revealing annuity rates having fallen by 14% since June 2009.  And clients in drawdown are seeing income falling as much as 50% following reviews.  It must leave you wondering how much worse it can get.

Clients approaching retirement may be finding their options unappealing.  They can defer taking income from their pension.  But for many this isn’t an option, they need the income now.  For others, deferring may help if markets recover, but there is also a risk in delaying annuity purchase. In the meantime, the bigger question (especially for those invested in lifestyle protected funds) may be will annuity rates recover?  Although there will be some upward movements, I believe the overall trend for the next few years will continue to be downwards.  There are simply too many factors at play putting pressure on annuity rates.  Over the next year or so we will see the introduction of equal rates (pushing down male annuity rates when currently 82% of annuities are bought by male clients), Solvency II increasing insurers’ capital requirements, ever-increasing longevity, and low gilt yields put under even more strain by the recent round of quantitative easing.

Many clients will be best advised to consider enhanced annuities, if they have the lifestyle or medical conditions to qualify.  Our data reveals the difference in income between the top enhanced annuity rates and bottom standard annuity rates come to 43% for men and 46% for women. Enhanced annuities have clearly come of age - last year they rivalled conventional annuities in the advised space for top spot in the sales charts.

The other traditional income option has been drawdown, but this has also seen its fair share of woes recently.  Falling markets, new (lower) GAD tables, and lower income limits of 100% (rather than 120%) has put some off entering drawdown, and many of those who have just gone through their five-yearly review have seen their maximum income levels fall dramatically.

Fortunately, the time when the retirement income market consisted primarily of conventional annuity and drawdown is long gone. The size of the market has increased exponentially over recent years, as more people approach retirement with a defined contribution pension pot.  Products such as flexible annuities are fast attracting followers, with ABI statistics show investment annuities now make up 7.3% of the advised retirement market¹, compared to only 4.7% in 2009¹. This is in part due to their ability to offer some form of guaranteed income to clients, whilst the funds remain invested and are able to benefit from any surges in market performance. Over the long term this provides the potential to stave off the effects of inflation and help clients retain the same standard of living throughout retirement, or even the possibility to grow their retirement income in real terms.

Choosing the best retirement income for your clients is not an easy task. One single solution may not suit a client’s myriad of needs, and instead advisers will be putting together a retirement income portfolio using several of the different product solutions on offer. Although falling annuity rates and the new drawdown rules makes life tough for those approaching (and in) retirement, it’s still possible to devise a retirement income solution that will help meet your clients changing needs for the whole of their retirement.

1 ABI stats, 2009 and first quarter of 2012, by premium