Square Mile Magazine, 2014. Original article (p84-85).
The wealth management sector and the pension rule change payday
Who will look after the baby boomers’ pensions? Now that the Chancellor has rewritten the book on retirement funding, wealth managers are eyeing a rare opportunity to take a sizable chunk of this market.
£12 billion was spent on annuities last year, as regulation meant the guaranteed income scheme was mandatory for many pensioners. As this will no longer be the case, insurers are licking their wounds as the annuity market is expected to fall by two-thirds over the next 18 months, according to Barclays Equity Research, or possibly even become extinct altogether.
“This is a huge change, and the effects on the wealth management industry will be very positive,” says Tom Hawkins, Head of UK Proposition Marketing at Old Mutual Wealth. “Now that the barriers have been removed, there will be a significant rise in the demand for individual advice.”
The effect won’t be immediate for the wealth management sector, as the pension changes won’t come into effect until next April. But reports from leading providers have suggested annuity sales have halved since the news, as people are delaying purchases to review their options in light of the new situation. Bank of America Merrill Lynch estimates the opportunity could be worth £6 billion for the wealth management industry, and this is at the conservative end of the spectrum.
As wealth managers are exploring how to best respond to this opportunity, Hawkins believes we can expect to see innovation in both products and packaging, as providers will be looking at their offerings with fresh eyes. “People may take an added interest in their pensions now that there’s this added motivation [of more choice]. There’s an opportunity to make pensions simple and engaging,” says Hawkins, stressing there will be a strong need to provide proper guidance.
Because the freedom to build our own pensions also comes with hefty dose of risk. “We will see more awareness around how to structure income in retirement,” says Ian Price, Divisional Director of Pensions at St. James’s Place Wealth Management. “But annuities will still remain relevant for many people, because the one thing no one knows is how long they are going to live.” While critics point to annuities becoming increasingly more expensive, they do shift the risk of longevity and investment value fluctuations onto the provider – a feature which will undeniably remain attractive for many pensioners.
Describing the new pension rules as a big surprise to the industry, Price is also optimistic that the new rules will lead to more awareness around retirement funding: “This could increase people’s faith in pensions, and encourage them to think more about their options.” The fact that people are less likely to go straight from full-time work to retirement anymore is also changing the financial needs of pensioners:
“I think building portfolios of assets to live off will become more common,” says Price, adding that this doesn’t have to be just shares and funds, but also ISAs and elements like buy-to-let properties. “People will have more than one income stream to live off in retirement.”
This has already started to happen: only 27% of professionals plan to rely on just on a pension for retirement income, according to a survey by Wesleyan Assurance Society released in May. While two-thirds of respondents admitted to be in the dark about how much their current pension arrangements are worth, over half said they plan to use property to generate additional funds.
Asked whether the new retirement flexibilities will be primarily of benefit to wealthy pensioners, Hawkins said the changes could be positive for anyone preparing to retire because it will encourage more people to seek financial advice. “The more affluent investors will often have financial advisers already, so they will have been aware of their options regardless. The opportunity is now for those with the average pension pot, which is £40,000, to become more aware of the available choices.”
While welcoming the relaxation of rules guarding the extraction of funds from pensions, David Stoll, Board Partner at Partners Wealth Management, is skeptical of the prospect that this represents a major change for industry: “In practice there will probably be little change in behaviour at the upper end of the market, where larger pension portfolios are already managed pre and post retirement without having the requirement to purchase an annuity, as has been the case for a number of years.”
Stoll also points to other factors, particularly in regards to tax, which will effectively restrict choice: “The new regime will not necessarily provide as much flexibility for all as heralded, and individual bespoke advice will remain as important as ever”.
Making sure people properly understand the risks, especially if they choose to take their money as a cash lump sum, will remain a key task for the wealth management industry. Concludes Hawkins: “The wealth management firms who will be successful under the new rules will be those who provide quality advice and flexible options.”