Nervous investors need advice four years into Pension Freedoms
This communication is for intermediaries only. It mustn’t be distributed to, or relied on, by customers.
There’s been huge growth in the retirement income advice market since the introduction of Pension Freedoms. New research from Aegon, commissioned to mark the fourth anniversary of the rules change, shows that we’re already seeing big shifts in the retirement patterns of retirees.
It’s no longer the case that most retire at a point in time and purchase an annuity. The retirement landscape has become more varied and complex, with retirees now choosing when they retire, how they invest and how much income they should take.
In this new world, most retire gradually, opt primarily for drawdown, and often hold a multi-asset investment strategy into retirement. However, investors are worrying about running out of money and remain unsure about how to navigate their options.
The need for advice in this space has never been greater.
Retirement patterns are fluid with partial retirement typical
Aegon’s survey of 250 financial advisers found that a significant proportion of clients now opt to retire ‘early’ or ‘late’, with 37% saying most retire either before age 60 or after 66. In addition, three quarters (74%) of advisers said most retire gradually, transitioning into retirement through a period of reduced hours or semi-retirement before stopping work completely. Just 20% said most clients go straight from their usual work pattern to full retirement.
To meet these changing needs, the savings industry needs to offer strategies that cater for a broader range of retirement patterns. This includes partial-retirement, as well as pre- and post- retirement phases. Partial-retirement savings may need to provide some degree of regular income, and there should be a gradual preparation for retirement, while recognising that savings may still need to last for 30-40 years.
Retirees select drawdown but worry about running out of money
Our results also highlight the caution and concern that many investors now feel about their retirement finances. While advisers tell us that on average 74% of assets are invested in drawdown compared to just 16% in annuities and 10% in cash, a significant 38% said running out of money in retirement was among the top three concerns their clients had.
The other two top concerns were fear of not being able to have the lifestyle they’d like, and not being able to maintain income in retirement.
What’s the biggest financial fear of retiring clients?With pension freedoms providing greater flexibility and choice, retirees are looking to advisers for help with managing money in retirement. When asked about common challenges their clients face, 75% of advisers said how to create a retirement income, 64% said understanding the options available, and 54% said making sure they were saving enough.
What are the most common challenges retiring clients face? Select up to three.While clients seem to be taking advantage of greater financial flexibility, it appears that they do this with some reservations.
Focus on risk reduction over investment growth
When we look at investment strategies retiring clients favour, over half (53%) of advisers say clients prioritise risk reduction over generating high returns or preserving the size of annuity they will be able to buy.
What is most important to retiring savers?
This emphasis on risk management makes a lot of sense, given the shorter investment horizon those in retirement will often have and the impact of regular income withdrawals on pension savings. However, too great a focus on keeping risk low could hamper savings growth and income longevity potential.
Multi-asset leads the pack
Interestingly, our results also show that a third of retiring clients’ assets are invested in multi-asset strategies. These strategies are well diversified, and are easy to use and explain to clients. They also often come with in-built risk management. It’s likely that advisers often recommend the same strategies that the client used in the accumulation phase, but dial down the risk level to cater for partial then full retirement.
What proportion of retiring clients’ assets are invested in the following investment types?
A high proportion of assets also remain in equities (growth and income), in comparison to lower-risk fixed income and cash investments. This may demonstrate a recognition that retirees could be in retirement for several decades and that lower-risk investments may not provide the growth potential to sustain a decent level of income. The recent poor returns from fixed interest will also be a factor.
What is reassuring is the range of investment types being used. In an area of the market where risk management is key, there is benefit in taking a diversified approach.
Where next for the retirement income market?
Retirement is increasingly a journey of change rather than an event. This comes with a behavioural shift in the way retirees choose to take income in retirement, with many now relying heavily on drawdown.
In the light of greater flexibility and complexity, clients are relying on advisers for guidance in the decisions they make. Many retirees are unsure of their options and fear running out of money. It’s crucial that these retirees seek financial advice to build confidence and manage their savings.
This is an area of the market that’s changing rapidly, and it’s one where we expect to see continued innovation. While the Pension Freedoms rules appear to have been embraced by many savers, they will only be tested in earnest when the majority rely primarily on defined contribution pensions, rather than defined benefit options.
This growing market creates opportunities for financial advice firms that can get to grips with this changing landscape and develop propositions to help retirees navigate their way to and through retirement.
The really big changes are yet to come.
Research carried out by Opinium on behalf of Aegon with 250 financial advisers. Fieldwork from 25 February – 1 March 2019.
The value of investments may go down as well as up. Clients may get back less than they invest.