Understanding the world of annuity and retirement planning isn’t straightforward, and here we consider some views from Mike Morrison, who is the head of pension development at AXA Winterthur Wealth Management. He starts by asking if you’ve ever noticed that there are a few words used, often in something like a conference speech, where the speaker actually apologises for using it, expressing some dislike of the words being used but then cannot come up with anything better instead.
“Holistic”, he suggests, is one of those words, and no one really likes it but it does its job perfectly. Another word which is appearing more and more in the pensions and annuities world is “decumulation”, used to describe the options available in using money that has previously been saved, i.e a pension fund at maturity, (this is as opposed to “accumulation”, which is to do with the act of saving). Now, decumulation may not mean a geat deal to the average man on the street but is a really useful word to use as an alternative to retirement.
Retirement planning and the potential to buy that pension annuity is an area not affected by the anti-forestalling rules in the recent Budget and it is likely to become a real growth area over the next decade as a result of baby boomer retirement demographics. Therefore, it should come as no surprise that this is an area of real focus for our financial planning industry – for both product providers (insurers) and advisers. These days, new products being launched are likely to be retirement products in the pension world, annuity contracts, income drawdown contracts or scheme pension plans, and in other areas, contracts such as equity release and long-term care. All aimed at the ‘at’ or ‘post’ retirement market. Any product development is very much focused on customer feedback and consumer testing and is therefore about asking people about how they plan to live in retirement.
The Association of Independent Financial Advisers (AIFA) recently launched a significant piece of work on this subject, entitled “Financial Planning through Retirement”, which actually recognises the special nature of the advice relating to retirement and which calls for a range of fresh initiatives, not least a glossary of straightforward plain English terms alongside a programme of sound financial education and something they call a “joined up regulatory and proper public policy approach to decumulation”.
Decumulation is a pretty complex area and the decisions that are taken can often be very much long-term and irrevocable; it is not just about getting annuity quotes and finding the best annuity rates. Not only is it the individual’s overall resources and their own personal circumstances that need to be considered, but some of the other environmental factors, such as longevity and the effects of inflation.
Consumers need to be educated properly, and this won’t be a quick fix. They need to understand some of the vital concepts, their attitude to risk, investment volatility, how annuities work and so on, so that they can really get to grips with the overall picture. Add to this a little bit of proper considered assistance from the legislators and the regulators, and we might be able to design retirement products that really meet client needs. There has already been a strong move in the financial services market place for advisers to have a robust investment process in place and Mike Morrison is now rapidly reaching the conclusion that advisers that want to succeed in the retirement market should also have in place a robust “decumulation” process.
