Pension choices to secure a reliable income

Nearly three years have now elapsed since the Freedom & Choice liberalisation of pensions, allowing investors far greater flexibility about what to do with their retirement savings. That’s deemed to be enough water under the bridge for the Work and Pensions Select Committee to launch a consultation into whether a sufficiently wide and cost-effective range of products has been launched into the marketplace for the reforms to work well.

The major change in 2015 under the pension reforms was that investors no longer had to buy an annuity with their retirement pots. That has spurred product innovation as providers vie for these newly liberated funds. While perhaps the pensions industry was initially slow off the blocks in thinking laterally about how to support investors in their search for retirement income, the last few years have seen a buzz of activity, resulting in the development of products that earlier generations could only dream of.

To showcase the range of options at retirement, including annuity purchase, flexi-access drawdown and a hybrid approach, we have asked a panel of experts to put forward their top choices in these categories, reflecting investors’ different priorities and needs. We also take a brief look at the broader strengths of online providers in the retirement income space.

Many thanks to our panel for their excellent insights, and of course congratulations to the providers of the chosen products, all of which are helping to make funding retirement a more flexible, transparent and rewarding process for consumers at large.

Enhanced annuity

First Choice: Just Retirement

Enhanced annuities are a crucial part of the pension armoury, allowing retirees with medical conditions or lifestyle factors that impact their life expectancy to benefit from an improvement in rates.

Just Retirement is a specialist enhanced annuity provider, universally admired for its efficient underwriting, competitive rates and speedy response times. The firm met with Abraham Okusanya’s approval for its ‘service, quality administration and competitive pricing’.

‘Shopping around for an enhanced annuity can be painful, and providers that make it easy with the simple and generic use of questionnaires will help those who may be struggling to find the right annuity for them,’ explains Trott.

‘Although rates and what classes as an enhancement may be complex and key to making the correct choice, they also need to be easily accessible. This usually means using a specialist in the area, so the provider understands the implications of each condition and how this may interact with other conditions the client may have.’

The mass exodus of providers from the annuity market underlines the importance of this category for the general public. At least six annuity companies have withdrawn from offering the open market option since the advent of pension freedoms in April 2015, which has had the effect of boosting demand for drawdown at the expense of annuities.

Monetary policy has also driven down interest rates to rock-bottom levels, which has slashed the providers’ margins; and to cap it all, tough EU solvency requirements that came into force in January impose high operating costs on insurers, by forcing them to hold sufficient capital to pay customers if they live longer than expected, or if the funds backing them perform worse than anticipated.

The FCA is also conducting an investigation into historic non-advised annuity sales, which is thought to have contributed to some providers feeling exposed and subsequently exiting the market.

Second choice: Retirement Advantage

Another specialist company, Retirement Advantage, is highly commended in the enhanced annuity category, and earned plaudits for its speedy response times and quotation accuracy. With £1.5 billion of in-force annuities, Retirement Advantage has roots dating back to 1852, but was rebranded in 2015 following the merging of the retirement income and equity release divisions previously trading under the MGM Advantage and Stonehaven brands respectively. The company has recently been purchased by Canada Life, which will lend greater backing; there are plans afoot to broaden the product suite, so it should be well placed to maintain a strong position in future.

Innovative income solution

First choice: Royal London

The innovative income solution category recognises products that offer a hybrid comprising a combination of annuity and drawdown in a single package, thereby providing investors with an element of guaranteed income coupled with the chance to benefit from further stock market growth during retirement. It is a combination that has clear attractions, if costs can be kept to a minimum.

‘Innovation in the income market hasn’t been as widespread as initially thought, but the key to providing the right balance between secure and flexible income has been taken on board by some providers and has been done well,’ says Claire Trott. ‘Not all solutions are the same, nor are they suitable for all clients, but having options is critical.’

Our top choice this year is Royal London, for its rather unusual proposition, which won particular plaudits for drawdown governance, a system allowing advisers and investors to conduct ongoing reviews and receive expert advice to help them stay on track.

‘Sitting outside the platform space, Royal London provides what we think is an innovative “solution in a box”, delivering a very good range of retirement and withdrawal planning tools, a low-cost pension wrapper and lifestyle investment portfolios designed specifically for those in withdrawal stage – which all work together inside an online portal,’ explains Mark Polson. ‘It also provides advisers and clients with an excellent degree of technical support.’

The company itself reported in August that the appeal of this drawdown governance service for advisers, which helps calculate sustainable income levels and produces client reports, has helped boost its new drawdown and individual pension business by more than 60 per cent in the first half of 2017.

Second choice: LV

Second place in the innovative income solutions category goes to LV, for the second year running. LV offers a range of income solutions that can be easily tailored to suit the investor’s career and budget, and its capital guarantees are valuable to investors who like to have the security of a guaranteed income for life.

LV also boasts a large case team and friendly and knowledgeable support staff. Henry Tapper also praised the company for its superb work with auto-enrolment scheme The People’s Pension. For example, members of The People’s Pension looking for guidance can receive a discount on the LV= Retirement Wizard online advice service.

Flexi-access drawdown 

First choice: Transact and AJ Bell

Flexi-access drawdown and uncrystallised fund pension lump sum (UFPLS) are relatively youthful product areas, but are becoming more popular as investors begin to appreciate the full range of options available under the new pension flexibilities. Flexi-access drawdown allows investors to take 25 per cent tax-free cash from their pot if they wish, and then to draw down income as and when they want to, so as to meet their outgoings and minimise income tax. UFPLS provides the opportunity for retirees to take smaller chunks of income from their fund, with each one carrying a 25 per cent tax-free element, providing flexibility without the higher costs and complexities of full drawdown.

‘Drawdown has historically been the staple of more bespoke providers, and has been less hands on for the client and managed by the provider or intermediary. However, for those who are in online or execution-only products, the need for these products is still there; the challenge is to provide sufficient help without directing the client to a specific outcome,’ comments Claire Trott.

She adds that ‘it is very difficult to rate drawdown and UFPLS providers because in many cases the underlying requirements of flexibility of investments or online facilities will determine what is the best option for any client.’ However, the two top choices, Transact and AJ Bell, stand out for their excellent administration and technical support, and both win praise for their simple charging structures as well as their flexibility.

Second choice: Aegon

The flexi drawdown category is challenging to judge in terms of product features and charges, with many providers offering a comprehensive range of investment options to suit all tastes and pockets. The greater differentiation is in communication, ease of use and outstanding levels of service. The highly commended nomination is therefore awarded to Aegon’s flexi drawdown offering, commended by the judges for its all-round user-friendliness, and by Henry Tapper on the basis of its ‘strong support not just for IFAs but for trustees of workplace pension providers’.

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