Decumulation is a much-misunderstood word. (Even your spellchecker doesn’t understand it!)
For too long, the pension industry has been guilty of looking at decumulation as a one-off event.
But decumulation doesn’t start when accumulation stops. It is a process that will change and evolve for each person.
It is also the area we need to tackle if we want to see people achieve better retirement outcomes.
We have been campaigning for the corporate pensions industry to tackle the issue of pension decumulation in light of the new pension freedoms.
Regulated advice solutions could be the real winner in the aim to get more people achieving a better retirement outcome. Perhaps it is time fo the advice industry to lead from the front.
It is estimated that 400,000 people retire in the UK every year with a defined contribution pension. It is also estimated that somewhere between 80% to 90% of those members will be invested in the default fund which is predicated on de-risking and buying an annuity at retirement.
A survey by Towers Watson predicted just 40% of retirees post-April will actually buy an annuity. By my simple calculations, that is more than 50% of people already heading in the wrong direction with their pension fund.
Obviously, that is a lot of people who will potentially be disadvantaged unless they are made aware of the problem and helped. No doubt many of these people will not be advised clients.
But a significant proportion will be, either via a group pension scheme you manage or an individual pension plan. Have you taken the necessary steps to help your clients?
Despite knowledge of the new freedoms for well over a year, employers, the government (via Pension Wise) and the general advice industry continue to focus on the ‘at-retirement’ stage.
We believe people need guidance and advice in the pre-retirement years if they are to have a chance of achieving a good retirement outcome.
So what do retiring people actually need and when? From our experience in this market, we believe people will look to engage about five years from retirement.
At that point, they need to decide what retirement solution is right for them and then implement the correct investment strategy.
This sounds relatively simple and when the vast majority of people were buying an annuity at retirement, to some extent it was simple: the default strategy, either ‘lifestyling’ or ‘target date’ funds, would actually be fit for purpose for the majority.
However, for the growing number of members now looking to use flexi-access drawdown, the existing default funds simply do not work and the new breed of drawdown decumulation options are proving less than satisfactory and could result in poor and dangerous member outcomes.
Why? Drawdown, unlike an annuity, is not a product and will constantly evolve in terms of the income taken through to changes in personal circumstances and the investment returns achieved.
One size does not fit all
Everybody’s retirement will be different and by default, and no two people’s drawdown strategy should be the same – a ‘one size fits all’ approach cannot be suitable. A more personalised approach is needed.
But taking a more personalised approach is tricky, particularly for group schemes because you don’t know what you don’t know.
While you will have some personal and financial information about each member, the chances are there will be far more you don’t know about them, including their objectives, other financial resources and personal circumstances.
As such, provider wake-up packs have little choice but to cover every possible option, and in most cases result in ‘over-information’ and a confused and disengaged member.
Many advisers will simply not have the resources to deliver a personalised approach for all members and some (employer and/or adviser) may see cost as a potential barrier.
Fortunately, help is at hand. There are new, innovative and cost-effective focused advice solutions in the market that can provide the necessary member support and achieve the best possible retirement outcomes.
Many of these focused-advice solutions, including our own ‘Pathways’ solution, are priced within the employer HM Revenue & Customs £150 tax-free allowance for the provision of retirement advice.
So whether you tackle decumulation in-house or in collaboration with a focused-advice specialist, now is the time to put decumulation on the map and set the standard for helping people achieve the best possible retirement outcomes.
Andrew Pennie is marketing director at Intelligent Pensions