Hybrid products spark life into the retirement income marketAegon Content Team 28 November 2016 Back to results
* For financial advisers only
Sales of hybrid cars are going through the roof, but why is this happening and what’s it got to do with the pension market?
When manufacturers launched the first hybrid cars, consumers understood the benefit but struggled to see how they could work in practice. There were few public charging points, battery lives were short, vehicle performance was poor and they couldn’t go that far on a single charge. Basically, why would you want one?
But today, charging points are springing up everywhere, while manufacturers have made huge improvements to the main features including battery efficiency, vehicle performance and the single-charge range. People can now see how a hybrid car would work for them and as they become mainstream sales are soaring.
Charging up retirement income with hybrid products
Essentially, it's no different in the pension market, although it’s not electric charging points that will jolt consumers into action. Hybrid retirement products are attracting the attention of pension savers and investors exploring their options to secure an income throughout their retirement.
Savers and investors need to understand how a product will work for them and why they should commit to it. Regardless of product or service, people need to have confidence that whatever it is that they are considering, it will deliver exactly what they expect, at the point they need it.
Product providers, financial advisers, regulators and government bodies all have an essential role to play in providing the information, guidance, advice and market environment required to give consumers this confidence.
Regulatory attention pulls hybrid products into the mainstream
This year, the Financial Conduct Authority (FCA) launched its Retirement Outcomes Review. The regulator is examining how customers and market practitioners are using pension freedoms, and is inspecting the ways in which competition is working in the retirement income market. The findings will be published next year and will explore the following topics.
- Shopping around and switching.
- Non-advised consumer journeys.
- Business models and barriers to entry.
- Impact of regulation on retirement outcomes.
One of the interesting aspects of this review, from a product perspective, is that the regulator has dedicated part of the examination to hybrid products. Their inclusion is a very clear signal that the regulator considers them to be more in the mainstream than the margin of the retirement income market.
In this context the FCA says hybrids are products that: “Offer some form of guarantee to the consumer. It encompasses newer structured products and variable annuities that offer guaranteed death benefit, guaranteed withdrawal benefits and guaranteed income benefits.”
The FCA has already said that in the months ahead it expects to see the emergence of more of these hybrid products that combine annuity and drawdown features.
When exploring the options available, it’s important to realise that the best hybrid products don’t simply bolt together an annuity and a drawdown product. The most sophisticated hybrid products offer the benefits of an annuity and a drawdown product, while doing away with the potential downsides of each.
Serving a need with hybrid products
True hybrid products – like Secure Retirement Income – can be interesting options for clients to consider when looking for a balanced level of flexibility and security. By offering a guaranteed income and the ability to stay invested, advisers can combine the security of an annuity with the flexibility of flexi-access drawdown for their clients.
In this way, hybrid products could make it possible to enjoy the upside of a guaranteed income for life and potential investment growth. At the same time, these products could prevent people from running out of money too early or, depending on the options selected, being unable to pass on money to loved ones.
Our research shows that the balance between a guaranteed minimum income and the flexibility of investment is important to pension savers and investors aged 55 and over. Canvassing this market, we found that income certainty was the most important retirement income feature (61%) for people, followed by the ability to access capital when required (32%). The research also found that the majority of people (56%) have either experienced or expect to experience a lump sum expense into retirement, underlining the need for flexibility.
Education central to practical understanding of hybrids
It is essential that clients understand exactly how they can reap the potential benefits of hybrid products within the context of their own circumstances. While staying invested could potentially allow for a rise in retirement income and fund value, baseline income remains protected in the event of a sharp fall in markets.
As with any financial decision, it is up to the provider to demonstrate the potential benefits of the product, while financial advisers are essential when explaining their mechanics and personal suitability to clients. The best hybrid products provide the option for increased control over capital, investment growth potential, flexibility and the ability to pass money onto loved ones after death.
Hybrids have to be part of the retirement income conversation
The fact the FCA has included hybrid products in its Retirement Outcomes Review demonstrates the more mainstream position they now enjoy in the retirement income market.
However, it is paramount that there is careful discussion, detailed explanation and clear communication around how hybrid products would work for clients in practice. It is for this reason that Secure Retirement Income is only available through financial advisers, who are best-placed to assess the needs of their clients as a whole and make recommendations based on their circumstances.
While they might not be the right solution for everyone, the role of hybrid products in the retirement income market should certainly be part of the conversation.