Flexible product innovation 'vital' amid changing retirement trends

Product innovation to allow for greater flexibility is needed to support changing retirement trends, according to research from the Pensions Policy Institute (PPI), which found that savers would benefit from having both flexible and guaranteed income in retirement.

The research pointed out the future pensioners will be more dependent on defined contribution (DC) savings, as they are less likely to have a defined benefit (DB) pension safety net, and may also face increased levels of financial risk.

In addition to this, the report noted that retirement patterns are changing, as people work longer to provide for themselves or prefer a more gradual move into retirement, suggesting that savers will need to take income in increasingly flexible ways as a result.

In particular, the report suggested that a lack of appetite for annuities means that hybrid products that offer both flexible withdrawals and guaranteed income may appeal more to consumers in future.

One way in which the market is adjusting to the new landscape, according to the PPI, is the development of products which offer flexible drawdown with an embedded guaranteed income element, of which there are two on the market.

The report also highlighted other product designs, not currently available in the UK, which could help meet the need for a guaranteed income while providing some flexibility and the opportunity to continue benefiting from investment returns, such as variable, deferred, fixed-term and built-in annuities.

In addition to this, it suggested that soft defaults tailored for different retirement need/desire archetypes could help people to better manage their retirement income

It explained that further pathways could be developed alongside drawdown investment pathways, to allow for those with varying needs and circumstances to tailor their retirement income strategy.

However, the PPI acknowledged that these strategies are likely to require further product development and potential reviews by The Pensions Regulator (TPR) to ensure the current regulatory system does not hinder more flexible approaches.

The report also suggested that a mid-retirement financial MOT, similar to the current mid-life financial MOT, could be helpful, and that further work is needed to ensure that take up of support options increases before, during and after retirement.

PPI senior policy researcher, Dr Mark Baker, commented: “As people’s working lives have changed, so have their lives in retirement. This represents a challenge for guaranteed income providers, as new approaches will have to be sought to meet the demands of a developing and flexible market.

“Timing annuity purchases with changes in need and the optimal price opportunity will require support for most people.

"Prompts to advice and guidance and the development of default pathways could become increasingly important for future pensioners seeking to secure a decent standard of living in retirement.”

Retirement Line director of propositions, Mark Ormston, agreed that in reality, a single product is unlikely to deliver best outcomes for people and further work needs to be done to normalise the idea of using a combination of products throughout retirement.

“It’s also clear from the report that there will be a growing demand for annuities in later life," he added.

"With this in mind, I hope annuity providers review their offerings to ensure there is not only a functional, but a competitive annuity market delivering value to people looking to annuitise in their 70s and 80s.

Hymans Robertson partner, Kathyrn Fleming, also argued that the need for innovation has "never been clearer", arguing that action must be taken by the industry.

"Firstly, we must re-frame our relationship with annuities and be more creative with the role that these can take in flexible retirement strategies," she stated.

“Secondly, we should challenge ourselves on the range of investment pathways that currently exist; adding new ones that are combinations of both drawdown and a guaranteed income at a pre-specified age.

“Finally, we need to raise the bar on how individuals are supported when making retirement decisions, from the first time they access their savings to a more ongoing basis."

Adding to this, Standard Life managing director for individual retirement solutions, Claire Altman, pointed out that innovation is already being seen internationally as the world moves to DC.

"In Australia for example, the Retirement Income Covenant now requires schemes to offer a degree of guaranteed income, with the option to keep funds invested and the ability to make flexible withdrawals," she stated.

"This kind of thinking highlights the scope for further ideas in the UK, and we expect new demand for solutions that speak to the whole of retirement, incorporating the best of drawdown and annuities.”

The PPI's report also follows analysis from LCP, which suggested that a new ‘flex first, fix later’ pension product could act as a post-retirement ‘default journey’ for unadvised savers.

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