'Flex first, fix later' pension could offer a new default journey

A new ‘flex first, fix later’ pension product could act as a post-retirement ‘default journey’ for the unadvised, LCP has said, after research suggested that inertia and cognitive decline could prevent savers from switching to an annuity at the optimum time.

LCP’s analysis found that for many savers, there will be an optimum age at which to ‘switch over’ from drawdown to annuity, primarily as getting rid of ‘longevity risk’ through buying an annuity becomes more attractive at older ages.

Although the exact age at which the switch should take place can vary according to a range of factors, the paper suggested that a switch when someone is in their late seventies or early eighties is likely to work well for most.

However, the research found that many people may not make this switch of their own volition, with inertia typically setting in after more of a decade of living off a drawdown pot, while cognitive decline may mean savers are less able to make complex financial choices.

In light of this, LCP proposed a new ‘flex first, fix later’ pension, where the later life switch to an annuity is ‘baked in’ from the start, in an effort to help overcome the inertia of waiting for people to actively switch into an annuity for themselves.

LCP also suggested that annuities could be purchased on a bulk basis by the product provider on behalf of policy holders, thereby potentially delivering a better annuity rate than a saver could secure for themselves as a retail customer.

While LCP acknowledged that there are many ways this concept could be shaped, it explained that the basic idea of a later life move to reliance on an annuity is one which is finding favour across pension schemes and providers.

In light of this, it argued that a 'flex first, fix later' product could be a new post-retirement ‘default journey’ for the unadvised mass market of people who had been auto-enrolled into workplace saving and now have to make choices about how to manage their retirement.

LCP partner and report co-author, Phil Boyle, stated: “Pension freedoms have given people the opportunity to go on investing into their retirement, and in many cases this will give them a higher standard of living than buying an annuity as soon as they retire.

"But annuities are still valuable products, especially as we get older. A ‘flex first, fix later’ product could give savers the best of both worlds – the flexibility and growth potential of drawdown in earlier retirement and the security of an annuity later on”.

Adding to this, LCP partner and co-author, Steve Webb, commented: “A great deal of policy attention has gone in to designing default options for workers when they are building up a pension pot, and there is growing focus on the decisions people make around retirement.

"But there is currently no default journey for people through a retirement which could last twenty or thirty years.

"The ‘flex first, fix later’ pension could be a default option which would help people to make the most of their pension savings whilst also giving them the later life security which they need.”

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