The new retirees

Jake PalenicekHead of Custom Research, UK
October 14, 2014, 9:10 AM GMT+0

Retirement plans used to be straight-forward, if slightly limited in scope. However, the government’s proposal to unleash annuities is already transforming the sector. Jake Palenicek, YouGov’s Director of Financial Services Research, looks at how consumers have reacted and what financial services providers can do to make the most of the new landscape.

This year’s Budget unleashed seismic changes in the savings and annuities market. With expanded ISAs, reduced taxes on savings, and massively increased flexibility in accessing defined contribution pensions, the UK’s pre-retirement population are now facing a transformed landscape, with much greater choice than they have ever had before. The changes have afforded much greater flexibility to those close to retirement, meaning they have the option of doing more things with their money.

As well as opening up annuities for consumers, the Budget announcement also altered the landscape for financial services providers, posing both challenges and possibilities. One of the greatest issues at the moment is the low level of awareness around the changes in annuities. Four in ten (37%) not yet retired over-50s don’t know about the changes to lump sum withdrawals, and half (50%) are unaware that they will still be given access to impartial advice.

Cleary, the Budget announcement rewrote the script for pensions and annuities and it stands to reason that providers engage consumers in some education about the options open to them. But it is not just consumers that need to get up to pace on the new rules. Financial Services providers need to understand that the increased flexibility afforded to consumers on how they use their savings mean there is now a much broader array of products in which those close to retirement can now legitimately consider investing.

YouGov’s new Annuities and Pensions Tracker monitors the attitudes and motivations of those approaching retirement towards the new options available to them. It reveals that a new mindset is developing among the over-50s, with people thinking much more actively about the type of products in which they wish to invest in order to generate income for their retirement, yet the picture is nuanced.

The tracker data indicates that the new legislation is already having a major impact on the financial plans of those approaching retirement. We found that four in ten (41%) over-50s are now planning on taking out a lump sum from their pension, and a similar number (42%) are looking for this as a feature in their pension. This is a notable potential new market for providers who are able to offer this option.

When the scheme was launched, there was a lot of talk about the frivolous ways that some retirees may fritter away their annuity. However, our research shows that a majority of not yet retired over-50s (54%) say they are interested in re-investing the money they withdraw from their pension fund in alternative investments. This opens up a huge audience for those brands that are able to offer the right range of products for these consumers.

However, any change in the way they use their annuity has to be done only with some important considerations in mind. The first is financial security as one of the over-riding concerns among those approaching retirement is making sure they know where their money is coming from. Our tracker data show that more than 7 in 10 men (72%) and 8 in 10 women (81%) over 50 rate having access to a guaranteed income for the rest of their life as being important to them.

This requirement for a secure income is closely matched by the second factor – the need for income to grow over time in order to offset increases in the cost of living. Seven in ten (70%) men and almost eight in ten (79%) women believe that having an income in retirement that grows with inflation matters. We found that there is very little variance in these numbers across income groups, suggesting that regardless of how much money an over-50s household brings in, the need for security and growth in any retirement product is essential.

The third factor that is important among those approaching retirement when it comes to changing their pension and annuity is flexibility. Over seven in ten (74%) say they want to know how and when they can take money from their pension, suggesting a real desire that such flexibility be integrated into product design.

It is clear that savers want a secure income in retirement, but they are willing to explore a whole new range of investments which may suit their needs better than the annuities which they were previously tied to. Consumers are crying out for well-informed advice to help them navigate this new landscape, but it will require a concerted effort to deliver this alongside credible new investment products that meet the concerns of the over-50s.

Therefore FS providers need to carefully understand the attitudes towards saving and investing which the UK’s pre-retirement population now has, and how best to tailor a diverse product line to suit their needs.

Image from PA