Billions wiped off retirees’ annuity spending power

Retirement income specialist MGM Advantage has revealed the true cost of inflation and how it will affect retirees' income over the coming years. Of the 400,000 people retiring each year who purchase an annuity, 90% choose a level income.

If inflation averaged 3% over a 25-year retirement, the real value of income reduces by 53%, collectively wiping £6.3billion off retirees' purchasing power over that period. MGM Advantage considers this a conservative figure and has based this on people retiring this year with an average pension pot of £33,000, choosing a level annuity with no escalation or index-linking.

Andrew Tully, MGM Advantage, said: "These figures show just how damaging inflation can be, wreaking havoc with people's pensions and wiping thousands of pounds off their income over time.

"People close to retirement have some very tricky decisions to make when looking to convert savings into retirement income. With record low annuity rates the obvious solution could be to shop around for the best starting income you can find. However, there are other ideas to consider which could help protect your retirement income from inflation.

 "With 90% of people retiring currently choosing a level income, we are storing up trouble for future years when you factor in the impact of inflation. While some economists forecast higher inflation over the short term, even if inflation remained at the target of 2%, the real spending power of peoples' income will reduce significantly over retirement. There are alternatives which may provide a higher starting income or the ability to hedge against the corrosive effects of inflation."


To read the full article in Investor Today, incluidng top tips for retirement, follow this link.

The advisers in denial about technology

According to Ian McKenna - director of the Finance & Technology Research Centre, financial advisers are not evolving as fast as they need to in the context of the wider economy.

• Research by comScore has identified that the over 55 age group is now the largest single segment of the UK Internet audience. They also identified that 82 per cent of mobile devices purchased in December 2012 are smartphones, for the over 55’s the figure is 71 per cent. The reality is traditional adviser clients are increasingly using technology.

•  Last year the Boston Consulting Group (BGC), arguably the most prestigious consulting firm in the world, identified the UK as having the largest e-commerce economy on the planet when measured as a percentage of GDP.

•   BCG projects that by the same measure by 2016 the UK e-commerce economy will be twice the size of that in the average G-20 country.

As identified above, the UK is the world’s leading e-commerce economy and the extent to which the UK leads the rest of the world is expected to increase over the next three years. Against this background, for how long is it reasonable to assume that financial advice will be immune from the advance of the digital economy?

Whilst adapting to a post RDR business model can reasonably be seen as a major evolution in advisers operating models, if in practice firms fail to adapt to the wider changes that are taking place in society they could leave themselves struggling to compete in the near future.

In reality wealthy people are early adopters of technology and as they increasingly use digital devices to manage their lives is it reasonable to assume they will not expect to use such services with their financial advisers?

If a financial services business sees itself in wind down mode expecting to exit in the next five years it may just still be a viable strategy to not have a comprehensive online service for all your customers. This would, however, severely limit the amount any new owner might be prepared to pay to the exiting principals.

Any organisation looking to continue to operate five years from now should be identifying how they can put in place an extensive online presence that enables them to service all their clients digitally.

The full article from Money Marketing is available here.

Ian McKenna is director of the Finance & Technology Research Centre

European Commission backs down over £450bn Solvency II-style plans

The European Commission has delayed introducing Solvency II-style capital requirements for defined benefit pension schemes which were estimated to cost £450bn.

Proposals from the commission requiring DB scheme sponsors to hold extra capital in order to better protect occupational pension savers sparked an industry fightback last month, with pensions minister Steve Webb, the Confederation of British Industry and the National Association of Pension Funds all uniting against the plans.

The plans were set to be introduced through changes to the Institutions for Occupational Retirement Provision directive.

European Commissioner for Internal Market and Services Michel Barnier said last week more research is needed before introducing the new capital requirements. He will set out legislative proposals in the autumn that will instead concentrate on occupational pension funds’ governance, transparency and reporting requirements.

To  read the full article from Money Marketing, please click here

The RDR 100 days on

As anticipated, most organisations were compliant with the statutory RDR requirements on day one and about 85% of advisors had gained the required qualifications and statements of professional practice.

Clearly some intermediary firms have been selling fee based propositions for many years. But for life companies and intermediaries embarking on RDR transition we estimate that the best prepared were at least 12 months ahead of the pack. We know that a number of players were burning the midnight oil between Christmas and New Year’s Eve and it is clear that many are still in transition to the post RDR world in terms of culture and, indeed, proposition.

We have identified some weaknesses in many of the post RDR service propositions we have seen. In particular some fee structures and rates seem to represent transition rather than the probable end-game; some ongoing service propositions do not appear compelling and there seems to be an absence of fail-safe systems and controls to ensure that the promised on-going service is actually delivered.

To read the full article, click here

Billy Burrows: Cheap is not always best for annuities

" I recently read that Tesco is entering the annuity comparison market. This provides me with the perfect opening comments.

Many commentators and annuity broking businesses view the annuity market in terms of lots of people with small pension pots who need to be sold the annuity which pays the highest starting income.

 It is hard to argue with the numbers; over £13bn of annuities are sold every year and the average purchase price is still less than £30,000.

It seems that Tesco and other firms who know a lot about retailing are aiming for this mass market.

But what about those who prefer to shop in more upmarket supermarkets where price is not necessarily the main driver and where personal service and quality are important factors. Where can they go to get advice on their annuities?

This brings me on to the theme of a paper which I have recently published in conjunction with MGM and Prudential and with help from Professor John Maule, a leading authority on behavioural economics.

The paper argues that it is time to question whether the traditional guaranteed annuity should remain as the default option for those with above average sized pension pots."


 To read the full article, click here and you can also download the report Annuities at a tipping point.

Call for pension savers to look at all options

 

In this week's BBC Your Money, Declan Curry looks at how to avoid fraudulent travel deals, sprucing up your garden on a budget and making the most of your pension pot. 

Nearly 400,000 annuities were sold to retirees last year, bought for an average of £28,000 from their pension pot. There has been criticism of the industry for not explaining to retirees that they can buy their annuity from any provider that they choose. This has led to the introduction of a new code of conduct ensuring that pension companies tell their clients that they can shop around.

Shopping around for an annuity or the Open Market Option, means that retirees can buy an annuity from any provider.

Watch the video 'Travel tips and pension pots'  with Billy Burrows from Better Retirement Group.

Drawdown rule changes could cost pensioners

Pensioners taking income drawdown could see hundreds of pounds knocked off their annual income as soon as April next year.

The news that yet more changes are in store for people opting to draw a flexible income out of their pension pot will come as a blow, as the Government has already chopped and changed the rules twice in the past two years.

A 65-year-old male with a £100,000 pension pot who agreed his drawdown rate before 26 March this year generates £5,800 of income a year. In January, the Government confirmed that anyone agreeing income drawdown after this date would be eligible for 20 per cent more income and could take £6,960 out of their pot each year.

To read the full article follow this link.