Financial Reporter: Do you feel the retirement market has changed as a result of the economic downturn?
Yes, there have been some significant changes to the landscape in two major ways. The first is the impact on products. Annuity rates have dropped significantly over the last few years – MGMs Annuity index shows that rates are down more than 20% over the last three years, with record falls of 7% in the last quarter alone. Annuity pricing is determined by a number of factors, including the yields available on UK gilts. And the quantitative easing program which the Bank of England has undertaken impacts gilt yields and therefore drives down annuity prices. Annuity rates are now around 5.7% but in March 2009 – when the first round of QE took place - they were 6.9%.
While there are a whole host of drivers for annuity rates QE, and its impact on gilt yields, is one of the factors which have pushed rates down over the last three years.
Income drawdown has also been impacted significantly. Partly this was due to the Government reducing maximum income from 120% to 100%, but the reduction in gilt yields has also had a major impact on drawdown income falling, as has the relatively poor investment performance over the last five years. Taken together this can mean drawdown customers are facing cuts in income of 40% or even 50%.
Advisers and clients are therefore considering more options such as investment-linked annuities, which give customers some flexibility over income and investment exposure while also benefitting from the key benefits of an annuity.
Clients’ attitudes have also changed during the economic downturn. Many pensioners rely on income from savings, and this has been dramatically cut over the last few years with interest rates on savings at historic lows. So some customers may be more wary about risks. While buying a lifetime annuity with a fixed annual income may seem an attractive route in one sense as it removes investment risk, it’s important for customers to appreciate it comes with other risks, notably inflation. A £10,000 annual income twenty five years ago in 1987 would now be worth around £4,000 after taking into account the impact of inflation. So blending some products together – for example a lifetime annuity and an investment-linked annuity - could be a good option for some customers, giving a good balance between risk and flexibility.
Financial Reporter: The MGM Advantage website mentions working to give your customers an advantage – what do you feel separates you from your competitors?
MGM Advantage is an award-winning company specialising in providing innovative retirement income solutions to help people make the most of their hard-earned pension savings when they retire. We’re one of the fastest growing companies in our sector, and a true business success story in an otherwise gloomy economic environment. We are focussed on helping customers secure the best possible income for their retirement by providing good value and easy to understand products.
One example is our flexible income annuity product, which allows people to change their income through retirement as circumstances change, and retain exposure to investments which will hopefully allow income to grow to offset the impact of inflation. As it is an annuity we can take health and lifestyle conditions into account when working out maximum income, and it gives the benefits of mortality cross subsidy meaning it is a lower risk product than income drawdown. It also comes with an underlying income guarantee for peace of mind.
We also want to make life easier for intermediaries who deal with us. For instance we will telephone a customer on behalf of an adviser and talk through the various medical and lifestyle conditions which they may have. After obtaining this full information we will provide our quotation for the adviser along with an electronic PDF version of the customers health and lifestyle information which they can easily and quickly email to other providers to get competitor quotes. So a simple and cost-effective way for the adviser to make sure they are getting the best possible income for their client.
Financial Reporter: How do you feel auto-enrolment will change the retirement income market – have you seen any shift in attitudes or trends already?
We’ve not yet seen any impact from auto-enrolment on the retirement market and I wouldn’t expect any changes to filter through for at least ten years. Auto-enrolment is being rolled out very gradually across the UK workforce, and contributions are starting at very low levels. So those reaching retirement any time soon will probably be able to take all of their benefits as a lump sum through the trivial commutation rules. In time, it will hopefully mean more people in the UK have decent levels of retirement savings. And it will clearly be critical that those people being auto-enrolled are also helped at retirement to shop around for the best retirement income product, taking into account their health and lifestyle as that can make a significant difference to the income they receive.
Financial Reporter: If you had to pick one financial product to become mandatory, which would you choose and why?
I would like to see many more people saving, but I’m less concerned about what route they use to do that. Whether it is a pension, an ISA or some other savings vehicle, it’s important we move away from as much reliance on debt. Many people also have exposure to property through their homes, or buy-to-let property so holding some other, more liquid, assets is important. Having all your eggs in the property basket also comes with significant risks.
Financial Reporter: If you were in charge of the Government for a day, what would you do to improve the financial landscape?
I believe one of the most crucial things we need as a society is more financial education, especially in schools. Helping people understand how financial products work – what an APR is, how to compare different products. Helping people work out how to budget. Showing them the cost of debt, and, specifically, the high cost of pay day loans. Illustrating the benefits of saving, whether that is relatively short-term saving for house deposits, holidays or cars, or longer term for retirement.
As far as retirement specifically is concerned, we need to get the message out that shopping around at retirement is crucial, rather than just taking the income on offer from the current pension provider. There are many different products available at retirement and the cost of getting it wrong can be enormous. So taking advice, if possible, or at least getting information and taking the time to consider the best outcome is well worthwhile. In particular people need to make sure annuity providers are aware of their health and lifestyle as that can often increase income by 20% or 30%.
Andrew’s primary role is the analysis and communication of pension regulation, legislation and taxation. He regularly writes and comments on pensions for the financial media and speaks at conferences and seminars. He is a member of the ABI’s Retirement and Savings Committee and is part of the management board running the Pension Income Choice Association. He is currently spending much of his time helping advisers work through the opportunities arising from the many changes taking place to the retirement income landscape.
Prior to joining MGM, Andrew was Senior Pensions Policy Manager at Standard Life, where he spent 18 years over two spells, and he also worked for 7 years at Scottish Equitable as Technical Development Manager.
