"I believe the [annuities] market represents a huge growth opportunity for advisers."
FR: Since Pension Freedoms, annuities have generally had a negative perception associated with them. How can the industry address this?
I am very passionate about addressing some of the negative perceptions about annuities. At Legal & General, we are really committed to the annuity market. That means going out and meeting with advisers to reaffirm our commitment to the market and demonstrate that annuities can be good value and could meet the needs of many customers.
We also need to support advisers in navigating customers through much more complex retirement needs and financial situations. Gone are the days when people stopped working at 65 and took a guaranteed income from their company pension. Retirement isn’t a single decision anymore and people don’t necessarily switch immediately from working to not. I firmly believe that the majority of retires will want some certainty of income in retirement, especially as they get older. We therefore need to help advisers to understand how annuities can be used as part of a flexible retirement plan.
What many people are unaware of is that annuities are also a central part of the social contract of pensions, investing in the future of our economy. We invest retirement savings in the economy with the aim of promoting a stable economic environment that provides financial security for retirees: it’s what we call the virtuous circle. We invest their money into infrastructure, homes and offices, which in turn grows the economy. And that growth is for the benefit of both younger generations and pension savers.
Whether it’s the social and economic value of annuities or the importance of a guaranteed income, I believe that the conversations we have with both advisers and customers is crucial to changing perceptions about annuities.
FR: How do you see the annuities market evolving over the next year?
I believe the market represents a huge growth opportunity for advisers.
Not only does the UK have an ageing population, but more of the workforce is now contributing to defined contribution (DC) pension schemes. In fact, 85% of active scheme members are now in DC schemes and The Pensions Regulator recently announced that DC membership had overtaken Defined Benefit schemes. Without a guaranteed income from their employer, this growing group of pension savers will be looking to established providers such as Legal & General for a guaranteed retirement income via an annuity.
The rising demand for annuities is certainly something we are seeing at Legal & General. We saw a 78% increase in our individual annuity sales in the year to 2017, and whilst some of this growth can be attributed to a consolidation in the annuity market after Pension Freedoms, we are optimistic about future growth. The ABI/FCA’s data too predicts an increase in annual annuity sales into the 2020s.
However, we can’t take this growth for granted. It will take the support of advisers, a trusted voice for so many consumers, to tackle the remaining negative perceptions about annuities and make sure those approaching, at and in retirement are fully aware of their options.
FR: What are the biggest issues facing retirees when it comes to retirement planning, and what should advisers be aware of when dealing with clients?
Pension reform has undoubtedly led to greater choice for consumers, but it hasn’t provided them with greater clarity about retirement planning.
The decisions on retirement income are no longer made for consumers; instead they face the challenge of deciding for themselves how they take their income. Their decisions need to take account of their needs and aspirations but also need to consider complex investment risk and longevity risk decisions. Advice is therefore more crucial than ever before when planning at and through retirement. The support of a trusted adviser can make all the difference in getting consumers to understand how their needs might change in the future and to consider the importance of ensuring sufficient guaranteed income throughout retirement.
Increased life expectancy brings challenges for retirement too, and again advice is central to helping customers to prepare. Retirement is no longer a once-and-done decision – this is a period that can now last 20 or 30 years. Neither is it a static time in our lives. A retiree at 65 is often living in a lifestyle that is far removed from someone in their 80s or 90s and the financial implications of issues like care needs must be considered, as these can significantly affect an individual’s financial situation.
My intention is for Legal & General to work closely with advisers to help customers make better and more informed choices, and to realise that retirement planning is an ongoing conversation. Advisers play a crucial role in making sure customers understand this and we need to make sure they too recognise the value of annuities within retirement planning.
FR: What type of customers benefit most from purchasing an annuity?
An annuity won’t be the right choice for every retiree, but for many people the security of a guaranteed income could be a very attractive prospect. I believe that annuities have a place in most retirement income plans as part of a wider arrangement that includes other sources of income, such as drawdown, property wealth and other savings where relevant.
For individuals seeking that certainty of a secure income in retirement that will never run out, investing a larger part of their pot into a lifetime annuity could provide them with the safety net they are seeking, giving them the peace of mind that monthly bills and costs are covered. Joint life annuities go a step further, offering consumers a product that pays out even when one annuitant passes away. For those wanting the comfort that their loved one would continue to receive an income in retirement should the worst happen, this could be a suitable option.
Clients with certain medical conditions like diabetes, or health-related lifestyle factors such as smoking, might want to consider an annuity as well, as they could benefit from a higher income through an ‘enhanced’ product. Providers have improved their underwriting capabilities significantly in recent years, so that even small factors such as weight or alcohol intake can also qualify for an uplift in income.
So, whilst annuities won’t be for absolutely everyone, there are clearly particular individuals who advisers should really think about discussing annuities with when it comes to building their retirement income plan.
FR: If you could see one headline about the retirement market in 2018, what would it be?
‘Annuities sales rocket as advisers embrace the importance of a guaranteed income in retirement’
We know some advisers think annuities are no longer relevant to financial planning following pension reforms, but we believe this is simply not true and we plan to prove it!
