The Big Question

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January 2008

Question: In your opinion what has been the most interesting development in the retirement planning market in 2007? How do you think it will develop over the coming year?

Each month, we ask our industry to answer one big question!

NICK BLADEN IS HEAD OF PENSIONS MARKETING AT SKANDIA

The strengthening of personal pension regulation by the FSA coupled with the introduction of SIPP regulation has been the most significant development in 2007.

This dramatic change is starting to alter the shape of the personal pension and SIPP market, and we expect more to happen in 2008 and beyond. The title of a product should reflect what it is, but is this truly the case for all SIPP?

Clients need to invest in products totally suited to their specific risk profile, needs, and suitability. Appropriate advice at outset and ongoing is paramount to ensuring the investment solutions, product, price, and retirement options deliver the desired outcomes.

Further strengthening regulation to achieve a totally consistent environment for all types of personal pension, including SIPPs, is vital in order to treat customers fairly.

ALASDAIR BUCHANAN IS HEAD OF COMMUNICATIONS AT SCOTTISH LIFE

Choosing "the most interesting development" is not an easy task. There's a long list of potential candidates, covering many aspects of the industry.

After a lot of thought, I've chosen developments in the income drawdown market. These are still at a relatively early stage but, for advisers and their clients, they offer a fantastic opportunity.

The key thing is to recognise that there are two distinct markets for income drawdown products. Firstly there's the "traditional" market, offering an alternative to annuitisation.

Since A-Day there's also been a second market. This relates to people over 50 who can release, tax-free, some of their pension funds, for example from a SIPP or a personal pension, and still continue to build up their pension savings. This opens up all sorts of opportunities and allows advisers to adopt a more holistic approach to managing their clients' financial affairs. I certainly expect to see a lot more IFAs taking advantage of this in 2008.

JANET DAVIES IS MANAGING DIRECTOR AT SYMPONIA

For me, one of the most poignant developments is the eventual realisation that the funding of care is a serious issue.

Care fees planning has grown up; it is a serious issue and it needs serious people to tackle it. The very clients that advisers covet (newly retired/high net worth), are the ones that desperately need guidance about what might happen to them and their money if care is needed.

Most practitioners classing themselves as specialists, concentrate in the immediate needs sector, while extremely sensitive and invaluable, the area shows no dynamism, innovation or a pioneering sense of adventure.

With care fees planning being given the respect it deserves newer products with a different approach are set to assist people plan for the future with a greater reassurance. The old style LTC plans are dead; rising from the ashes are hugely innovative companies such as Life Trust, whose Longevity Payment Plan could ensure that everyone approaching retirement has the opportunity to plan effectively and Lincoln, whose Elderly Care Benefit could awaken a much younger audience.

JOHN DIGMAN IS HEAD OF EQUITY RELEASE SERVICES AT NEWCASTLE BUILDING SOCIETY

2007 has seen continued growth in the equity release industry and its growing importance in supporting the traditional methods of funding retirement. The latest figures from SHIP indicate that the market is likely to reach £1.3 billion by the end of the year, an 11% increase on 2006.

This year has also seen a dramatic change in the product mix of equity release. The impact of drawdown has changed the shape of the market and, at last count, represented half of all plans sold. This is set to continue well into 2008 with those providers who have missed out by not offering drawdown introducing new products.

DAVID DUNN IS DIRECTOR OF THE FIDELITY RETIREMENT INSTITUTE

One of the most interesting developments of 2007 has been the emergence of new products that recognise the risks retirees face. Historically, the majority of a retirees' income would arise from two sources: state scheme benefits and a company pension plan (usually defined benefit). The defining feature of both these sources of income is its durability. These will still be important sources of income for the foreseeable future but their influence is reducing.

Consequently, people need to take greater responsibility for their financial security in retirement. Increasingly, they're using a combination of pension and non pension assets. This trend has led to a spate of new products. Some involve offering guarantees in a similar fashion to annuities but without the inflexibility of conventional annuities. Variable annuities are perhaps the best example of products in this category. Next year I would expect to see further innovation in this area as companies compete to grow their share of this lucrative market.

ANDY GADD IS HEAD OF RESEARCH AT THE LIGHTHOUSE GROUP

In considering this question I was reminded of a quote by Peter Drucker, the American (Austrian-born) management writer. On the 25th September 1999 he wrote an article entitled "Innovate or Die" in the Economist Newspaper (US) in which he commented that, "By providing financial protection against the major eighteenth and nineteenth century risk of dying too soon, life assurance became the biggest financial industry ... providing financial protection against the new risk of not dying soon enough may well become the next century's major and most profitable financial industry." I think that Mr. Drucker was spot on and that it is this theme that is and will continue to be, the most interesting feature of the retirement planning market.

JOHN GLEADALL IS SENIOR PENSIONS TECHNICAL MANAGER AT LEGAL & GENERAL INDIVIDUAL WEALTH

To my mind, the most significant retirement planning development of 2007 is the arrival of the variable annuity (VA). There is a vast wall of "baby boomer" money about to hit "retirement" over the next nine or ten years. Given the increasing (though misguided) perception of traditional annuities as offering poor value for money, a product using retirement funds to provide both a capital guarantee and an attractive minimum income level has every chance of success.

ASTON GOODEY IS BUSINESS DEVELOPMENT DIRECTOR (RETIREMENT INCOME) AT PRUDENTIAL

We have seen consumers becoming increasingly aware of the benefits of investment-linked annuities, especially with-profits annuities. We have also seen the development of a range of new products (most commonly referred to as the third way) in the retirement income and annuity markets that should help increase consumer choice.

In terms of future market developments I think we will continue to see new entrants to the 'third way' market by mainstream UK life offices, the impaired market will become more crowded, and 'real time pricing' (i.e. get a rate from co. X and we will beat it) will become of thing of the past as it will become an aggravation to IFAs chasing their tails to get the best rate. Alternatives to conventional annuities will grow, in particular with-profits annuity and drawdown.

SIMON LITTLE IS BUSINESS DEVELOPMENT DIRECTOR AT HOME & CAPITAL

Without a doubt the most interesting development has been the emergence of equity release as a mainstream product. Some providers are beginning to re-badge equity release as the new 'Home Retirement Plan' as part of its increasing popularity with Britain's growing number of retired homeowners.

It looks more likely that 2008 could see the turning point for equity release thanks, in no small part, to the credit crunch, as more and more lenders and advisers look for new markets to enter as others such as sub-prime mortgages and buy-to-let shrink.

PETER MAGLIOCCO IS ASSOCIATE REGIONAL DIRECTOR AT ALEXANDER FORBES ANNUITY BUREAU

Three issues immediately come to mind when looking back on events in the retirement market in 2007. A steady rise in conventional annuity rates; the introduction of third way products to the UK and, to the surprise of some, the fact that equities go down as well as up!

Conventional annuity rates, moved from £7031 in January 2007 to £7383 in December of this year (based on: male 65, £100,000 fund payable monthly). Unfortunately, in my view it looks like this Indian summer is now drawing to a close and rates I feel will start to fall away during the remainder of 2007. Third way products also came to town and in 2008 I feel that this market will take off, particularly with the volatility in the equity markets.

Finally, after three or so years of strong stock market performance, the importance of a robust approach to investing money is now being brought clearly into focus. It seems that some clients have a tendency to forget that equity markets will move both up and down. Therefore, a vigorous advice process is essential to maintain your ability to continue providing quality advice moving forward.

MIKE MORRISON IS PENSION STRATEGY MANAGER AT WINTERTHUR

I think the most interesting development has been the increasing questioning of the lack of annuity flexibility. I am sure this will continue and we will see more innovative annuity designs. Hopefully the Treasury will reconsider its decision not to offer more flexible annuity structures.

IAN NAISMITH IS HEAD OF PENSIONS MARKET DEVELOPMENT AT SCOTTISH WIDOWS

A-Day gave SIPPs a huge boost, and they have moved from a significant niche into the mainstream. The major insurance companies have entered the market in a serious way, having often viewed SIPP as a hygiene factor in the past. Specialist firms continue to offer a wider range of bespoke investments than insurers ever will, but self-investment is now available on an industrial scale.

SIPPs became regulated in 2007, and companies marketing them should now be robust and provide clear information to their customers. Tighter regulation may come following the current FSA thematic review. The Retail Distribution Review is also positive for SIPPs because many tie in perfectly with current thinking on adviser remuneration.

Looking to the future, group SIPPs will become increasingly popular. There are many challenges ahead, but at the higher ends of the market there will be great opportunities for providers and advisers.

MARK NISH IS DIRECTOR AT CHARTWELL PRIVATE CLIENTS

Although personal accounts are not scheduled to be introduced until 2012, their potential impact is expected to show in the coming year. This is likely to be in the form of fevered activity by the financial services industry to inform employers of the proposed changes, with a twofold objective, namely: to retain the business that they already have on the books, and to try to secure new business from those employers who currently have only a designated stakeholder scheme in place.

The financial services industry can fulfill a useful function for the Government in educating the marketplace. The rules are complex, particularly in the area of 'exemptions' and this is where there is a danger of the employer becoming bogged down in bureaucracy, possibly leading to perfectly acceptable schemes closing in favour of personal accounts.

BOB PERKINS IS TECHNICAL MANAGER AT ORIGEN

The main thing that springs to mind is "third way" products in the pension decumulation market. They provide a real alternative, in appropriate circumstances, for those who want to have more from their pension funds than an annuity can provide but who want to reduce the exposure to risk.

Currently there is limited choice and the main players all offer slightly different variations on the theme but I can see that expanding over the next 12 months. These plans will undoubtedly increase in popularity as they become more established and inevitably adopt common "best ideas". To a lesser extent (but only because there is still some time to go to their launch) the development of personal accounts continues to catch the eye.

IAN PRICE IS DIVISIONAL DIRECTOR - PENSIONS AT ST. JAMES'S PLACE

While we may not have liked it, the clarification on alternatively secured pensions and scheme pensions was crucial. Understanding what options clients have when they want to take benefits is really important.

Another important issue is the growing understanding of life expectancy. The fact that we are living longer affects us all and, irrespective of the chosen investment vehicle, understanding this from a retirement planning point of view is essential.

It is also important to recognise that the Government is, once again, increasing the profile of retirement planning by looking at the introduction of personal accounts/NPSS.

It is vital that we continue to talk about retirement planning and the impact of longevity in order that consumers understand how much money they need to save for retirement.

CHRISTOPHER READ IS CHAIRMAN OF DUNSTAN THOMAS

The activities required around A-Day and R-Day certainly held the SIPP product innovation schedules back but now that regulation is fully in place providers have turned their hand to retirement planning product innovation.

The emergence of a number of new corporate SIPPs in response to the withdrawal of many occupational DB schemes is the most exciting development in workplace pensions this year. These products, at least in theory, offer employees valuable investment choices and benefits options through drawdown.

While this is all very exciting, Dunstan Thomas' only fear is that some of these new corporate SIPP propositions may not in fact offer all the benefits that a SIPP has to offer, such as access to property asset classes.

DAVID SEATON IS DIRECTOR OF CONSULTANCY AT ROWANMOOR PENSION

With the advent of Pensions Simplification it is surprising that so few new products have been designed to maximise clients' options.

The most innovative product to have been developed is our own Family Pension Trust. A separately registered, operator based, self-invested personal pension scheme set up under trust for more than one individual.

The product has three distinct advantages over conventional SIPPs.

- The members, as trustees, are in control of the scheme's assets which are registered in their names and not solely the operator's. This mechanism has three distinct benefits:

- firstly, there is more flexibility in acceptable assets and the operator has less liability of ownership;

- secondly, it is far easier to hold a property in one Family Pension Trust than a group of individual SIPPs and

- finally, the exit of a member due to retirement or death is far simpler and less costly to administer.

- Family members, or business partners, can pool their pension assets and borrow up to 50% of the combined total.

- For large pension funds at age 75 where annuities are not to be purchased a scheme pension can be established with a ten-year guarantee allowing far more to be extracted from the pension fund than through a conventional alternatively secured pension which cannot have a guaranteed period.

I think we will see more Family Pension Trust style products being offered onto the market probably under a name such as the Family SIPP with a number of major providers copying the successful formula.

ANDREW TULLY IS MARKETING TECHNICAL MANAGER AT STANDARD LIFE

The undoubted success in 2007 has been the explosion in the number of self-invested personal pensions (SIPPs).

It is likely the Government will allow people to self-invest their protected rights money during 2008. This means much of the money held in protected rights - estimated to be between £75 billion and £100 billion - will make its way into SIPPs.

New retirement guarantees will become widely available that are similar to the variable annuity products which dominate retirement income provision elsewhere.

SIPPs have only scratched the surface of the UK's retirement savings. Current estimates are that some £40 billion is now accumulated in SIPPs compared to the estimated £1,600 billion held in funded UK pensions. It seems clear that the SIPP success story will continue through 2008 and beyond.

RACHEL VAHEY IS HEAD OF PENSIONS DEVELOPMENT AT AEGON SCOTTISH EQUITABLE

2007 has been the year that kick-started new pension harvesting options.

For too long people have been faced with a stark choice between buying an annuity or taking drawdown. Both are suitable for a wide range of people - as long as they understand and are comfortable with how much risk they are taking.

Over the last 12 months however we have seen the emergence of so-called third way annuities. I expect this new market to go from strength to strength in 2008, as more players start to compete. More people are retiring with larger defined contribution pension funds. They need to buy an income that suits their needs but also starts to address their expectations. Third way annuities do exactly that.