Retirement Finance

Read our blog post “Retirement finance – is the pension industry ready for radical change?” to learn more about the changes to pension rules and what they may mean for new opportunities in the retirement finance market.

 

 

Is the pension industry ready for radical change?

 

In the 2014 Budget, the UK Chancellor announced changes to pension rules meaning retirees are no longer forced to buy an annuity with the proceeds of defined contribution pension schemes.

 

Whilst the details and implications have still to be worked through, this simplification may well lead to wide ranging changes to the insurance, fund management and IFA sectors and possibly beyond, opening the door for innovators to reform a poor customer experience offering limited product choice.

 

 

The UK pension market

 

The retirement finance market is an interesting one – a massive market that continues to grow, served by an outdated sector built around a single product  (with limited variations) and offering a poor customer experience, whilst operating with high costs and low transparency, and addressing only a very narrow part of customers’ in-retirement needs.

 

The funds held in private pension schemes have increased steadily to over £2 trillion in 2010 (with an understandable drop in 2008). Over the last decade there has been a trend away from defined benefit schemes to defined contribution schemes with almost 40% of occupational pension schemes in 2012 being defined contribution. About half of private pension funds – £1 trillion – are affected by the recently announced changes.

 

There are over 12 million people at pension age with over 8 million pensioner households. Average spending each year for single pensioners is around £12,000 p.a. and for pensioner couples around £22,000 p.a., with most spending on food and drink, housing costs, transport, recreation and other costs (incl. council tax).

 

Typically income in retirement comes from multiple sources – state pension benefit, occupational pensions, personal pensions, investment income and earnings. On average a single pensioner has an income of around £18,000 p.a. and a pensioner couple of around £35,000 p.a.

 

Traditionally, we have saved for retirement by making regular contributions to a pension scheme with the expectation that only one option is available on retirement – purchase of an annuity (with the possibility of taking up to a quarter as a tax free lump sum). And that it was ‘pot luck’ as to what retirement income we would get, depending on the annuity rates at the time we decide to retire. Worse still, most people have just accepted the annuity product offered by the firm who they saved with for their pension.

 

Despite growing pension pots, falling annuity rates have resulted in relatively flat average income from annuities. Recent years have seen an inevitable drop in annuity sales of over 20% from 2009 to 2013.

 

 

What’s changed?

 

The UK Chancellor announced in his Budget 2014 speech that the requirement to purchase an annuity with the proceeds of defined contribution schemes will be removed.

 

Complementing this, it was announced that the government would introduce a new guarantee, enforced by law, that everyone who retires on defined contribution schemes will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.

 

 

The opportunity

 

Whilst the details and implications have still to be worked through, the simplification in pension rules could lead to wide ranging changes for the insurance, fund management and IFA sectors and possibly beyond.

 

The challenge is to ensure innovation isn’t stifled by new regulatory requirements and that government intervention to ‘help’ new approaches (such as for guaranteed advice or guidance) doesn’t displace entrepreneurial activity.

 

In particular, there is an attractive opportunity for tech-enabled innovators to reform a rather poor customer experience offering limited product choice. With a cost-laden and opaque business model, the established ‘retirement finance’ industry is ripe for radical change.

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