Changing retirement planning landscape
Steve talked about the new pension freedoms which were introduced in April, progress since then and his predictions for pensions in the future.
He explained that over £1bn has been withdrawn ‘early’ from pension pots in the first six months of the new pension freedoms.
This has been judged ‘a success’ by the government, but if it is money being withdrawn from pension pots and simply spent, it might have a detrimental impact on future lifestyles in retirement.
Looking to the future, Steve made predictions for changes to pension taxation, which we expect to see introduced later this year.
His assessment of the Pension Green Paper is it is more of a cost reduction exercise than genuinely about incentivising savings.
A proposed move to a taxed – exempt – exempt pensions structure (from the current exempt – exempt – taxed system) would require a government top-up for the lower paid.
It would also completely change the risk profile of pension savings, as savers would be exposed to the risk that a future government would change the rules again to something like taxed – exempt – taxed.
There were also questions about how to approach public sector defined benefit pension schemes.
Steve looked at one example, of the Firefighters Pension Scheme, and calculated it could result in an effective pay cut of 20%; something it seems unlikely the Unions would entertain.
One of the most valuable parts of his presentation was looking at life expectancy figures and their importance in retirement.
Men who are 65 years old today can expect to live to 86.5 years old, on average.
However, 22% of them will live until their 95th birthday and, because of the way in which averages work, 50% will run out of money if they simply budget to spend it all by their 87th birthdays.
Life expectancy is a moving target, because it improves with age.
Longevity risk therefore needs insurance, but there is no specific insurance product available to insurance against longevity because the risk is too idiosyncratic.
Steve finished by talking about the role of enhanced annuities; these offer a higher annuity income for those with reduced life expectancy due to medical conditions.
He sees the role of enhanced annuities changing from maximising income in retirement to minimising the cost of securing a guaranteed level of income.
Looking to the future, he expects to see the launch of new retirement planning products in the not too distant future, probably a hybrid of the guaranteed income from annuities with the flexibility of income drawdown.
Retirement planning is undoubtedly changing and it is reassuring to hear from product providers who are considering this new landscape, and what it will mean for our clients.