Chris Pitt: Retirement planning no longer a ‘one-and-done’ decision

The latest IRESS retirement report suggests there are now several phases to retirement while income requirements change over time, says Chris Pitt – yet sustainability of income remains crucial throughout.

The latest IRESS retirement report, Staying Afloat in Retirement – Income and Annuity Perspectives, confirms what many advisers are already seeing in their dealings with clients: retirement is no longer a ‘one-and-done’ decision.

In the past, when people retired then, for all but the very wealthy, the guaranteed fixed income of an annuity generally met their later-life income needs. But changes to our demographics, social norms and the balance between generational finances have also changed the face of retirement, while pension freedom has given advisers and clients more options to meet their new requirements.

Retirees are arguably now better off than they were 10 or 15 years ago and many are making the most of this, with spending and financial commitments running up to and in the early stages of retirement.

In the early years, people may now be paying off mortgage debt or acting as the ‘Bank of Mum and Dad’ to help their children with university fees or house deposits. Encashing a pension fund in full at retirement, however, or using it all for drawdown to service ongoing financial commitments creates a risk of running out of money or having an income that fluctuates.

Using some of a pension fund for a fixed income could be a useful alternative to help cover any regular payments that continue in early retirement, is generally free of investment risk and can be free from mortality risk.

While it may seem incongruous that a fixed-term product should play a key role in facilitating flexible retirement income, it is a growing trend. According to our data, fixed-term annuity quotes now account for almost a quarter of all those produced – up from 15% at the end of 2015 – and the 55 to 69 age group accounts for 92% of all quotes produced.

Advisers and consumers are clearly seeing the guarantee of a minimum level of income as an option for servicing fixed-term financial commitments.

Another potential solution to the issue of meeting changing financial needs is equity release, which is experiencing significant growth. We have seen equity release comparison volumes up 34% in June 2017, compared with a year ago, as retirees make use of their largest asset.

From our data, the average age for equity release comparisons is 69, indicating it is typical for equity release to be taken beyond the initial stage of retirement or starting benefits from a pension pot. The average loan-to-value ratio is 19% and more than half of new plans are taken out in the form of a drawdown arrangement.

All this points to equity release as one element of a wider suite of retirement income options – it can be used to top up retirement income so people can either delay annuity purchase and/or stay invested for longer.

Certainty of income

At later stages of retirement, ill health may become an issue, with certainty of income becoming a greater priority than flexibility. At this point, enhanced annuity rates may become an option. According to our data, 55% of quotes produced now include some medical and health information, suggesting awareness among consumers is growing around the important of full disclosure when comparing annuity quotes.

Retirement today is a journey and not a destination. Sustainable retirement income remains a core priority, but the reasons for needing it are changing and ‘sustainable’ does not necessarily mean life-long. Today’s retirement planning means advisers and clients need to adapt to the new multiple stages of retirement, where specific income requirements change over time.

The increase in popularity of options such as fixed-term annuities, enhanced annuities and equity release suggests retirees are becoming more discerning – exploring and testing the various flexible options open to them.

With the Financial Conduct Authority taking a close interest in this space, the challenge for the industry is to innovate with competitive products that can adapt and interact to achieve the results needed for a more flexible period of later-life living.

Hopefully the regulator’s Retirement Outcomes Review will also further stimulate demand for advice to help consumers better navigate these complex decisions.

Chris Pitt is head of market analysis at IRESS