By , 13 January 2014Market Intelligence | Retirement Income
As defined benefit schemes close and the state pension age is pushed back, private personal pensions are the fastest growing source of retirement income for the over 65s in the UK. Although securing a guaranteed income in retirement often ranks as their top priority, surveys have shown retirees have a wide range of requirements from their retirement income solutions.
The ability to pass on remaining funds as an inheritance; the potential for income to rise in the future; and the ability to access money in an emergency all rank highly in their list of preferences. Despite this traditional annuity and drawdown products continue to struggle to meet retirees’ needs, driving the demand for new ‘third way’ solutions.
These third way products include invested annuities, unit-linked guaranteed products and retirement target date products, and each offers its own blend of the security offered by traditional annuities with the flexibility of traditional drawdown solutions.
Products such as retirement target date funds suggest investment suppliers are developing an increasingly nuanced view of the retirement income market as they recognise younger retirees are coming to regard retirement less as a ‘cliff-edge’ and more as a phased process (during which they may continue to work part time). In short these products allow retirees to postpone acquiring income security in return for continued exposure to growth in the early stages of their retirement.
The diversity of third way offerings points both to the difficulty in designing a ‘one-size-fits-all’ retirement income solution and the continuing opportunity for new entrants to develop innovative approaches to meet the growing retiree demand. Advisors have not stood still in developing their own responses to this demand, offering blended solutions that attempt to draw together fund products with a phased approach to annuity purchase.
Although current third way options have gone some way towards meeting the competing needs of retirees, the requirement for continued product development remains. Most third way products and blended solutions remain out of reach of the mass market. In addition current solutions have been accused of opaque charging structures and levels of complexity that make them hard to explain to prospective retirees.
The greatest challenge facing providers of retirement income solutions, however, remains one of delivering sufficient levels of flexibility while still affording the income certainty that tops retirees’ current lists of requirements.
Delivering these solutions is likely to require close co-operation between investment suppliers and insurance providers to produce new third way solutions that not only meet a greater range of retiree needs, but do so in a simpler and more cost effective manner