Pension Freedoms – Is it really that simple?

“Financial services needs to be able to adapt to the changing circumstances that real life throws at people, rather than being designed for the mythical perfect customer who never experiences difficulty.” – FCA Research¹, Occasional Paper 8: “Consumer Vulnerability,”

There’s no doubt that pension freedom has given a huge amount of flexibility to people in their retirement income choices, even to the extent of allowing them to remove all of their money from their pension in one go.  No longer is anyone locked into buying an annuity (although that hasn’t been the case for quite some time), constrained by GAD limits on drawdowns or facing the prospect of seeing at least 55% of their money taken away when they die. 

The new rules grant people almost total freedom to choose the best way to provide for their retirement using the funds they have built up over a working life.  They are free to draw regular income or lump sums as they see fit to provide for almost any need, not even necessarily their own, and to plan the best way to hand over their assets when they are gone.  The choice is enormous, especially for those with large funds inside and outside pensions.

However, not only do people have huge choice but now the onus is on them to make the right choices, for the rest of their lives.

But this is a market in which we know there are already difficulties in understanding.  In 2014, FCA-commissioned research² showed only 36% of those at or close to retirement felt completely or well prepared to make decisions about their retirement income.  Associated research demonstrated: 

• Limited understanding during accumulation of how retirement income is delivered
• Respondents do not consider the long-term impact of small differences in income
• Respondents underestimate longevity risk
• Limited awareness of alternative products
• Limited understanding of investments and no consideration of capability to make future decisions[1]

This is obviously where financial advisers make a dramatic difference, guiding clients through the myriad of options for their multiple sets of assets, constructing appropriate blends of products and investments to produce the required outcome with an acceptable degree of risk.

Even so, for a great many clients presenting flexibility with clarity and simplicity can be a tough job and the work involved can be expensive.  Packaged solutions can help greatly but until recently they were usually not available, especially if you wanted to include an element of guaranteed income in your client’s portfolio.  The separate elements of retirement provision had to be dealt with using separate contracts and transfers between elements could be difficult and time-consuming.

What does good look like to consumers? The FCA lists a large number of factors based on its own research.  Most of them would not be a surprise to any adviser and will be well integrated into your processes but those that relate specifically to the products include: 

• Having financial products that are well designed, clear and easy to understand
• Feeling that firms will treat you as an individual, offering a flexible and tailored response
• Products that will meet needs over a lifetime

Partnership’s new hybrid product, the Enhanced Retirement Account, addresses these issues, provides a packaged solution for the needs of many throughout their retirement and supports advisers in delivering a cost-effective service to those clients.

Income can be tailored from a combination of drawdown and guaranteed income to match a client’s requirements for security and flexibility throughout their life.  The guaranteed income is based on their individual state of health, maximising the amount that can remain invested for flexibility.  As circumstances change, this income can be topped up and can even be suspended and reinvested in the plan at no additional cost.  These features will facilitate planning for tax, changes in health and even declining capacity later in life.

The investment choice ranges from 100% fixed interest to 100% equity in a range of passive funds from Vanguard, the world’s leading provider of passive funds, with unlimited switching at any time in line with client requirements.  The investment proposition is simple and low cost, offering clarity and flexibility tailored to client circumstances throughout retirement, especially when matched with the guaranteed income.

The hybrid, packaged proposition considerably reduces administration and reporting, simplifying tax returns and ensuring everything remains clear and easy.  Our calculators will help you determine the appropriate split of guaranteed income and flexible investment.  And costs are reduced for your client with fund charges ranging from only 0.43% to 0.59%³ leaving them more of the benefits of investment growth.

With Partnership, it can be that simple.

For more details on the Partnership Enhanced Retirement Account, contact us on call 0333 043 7040* or visit the website: www.partnership.co.uk