Whilst the introduction of Pension Freedoms does of course deliver greater choice to the consumer, it also brings the responsibility of ensuring that income needs in retirement are met at a time when the government is continuing along its stated path of creating a high wage, low benefit economy.
To meet this responsibility requires an understanding of longevity and typical patterns of consumption and expenditure during retirement. Indeed, until we better understand real life retirement journeys, it will be difficult to take full advantage of the new flexibilities in ways that best meet long term income needs. And how many consumers will be in a position to access, understand and analyse this kind of information for themselves? And for that matter, how many will want to?
A recent report by the International Longevity Centre – Understanding Retirement Journeys: Expectations v Reality (Nov 2015) – may help to shed light on what consumers can expect to happen during retirement. It outlines the findings of detailed, large scale research into what retirement is really like, and it may have important implications for policy, product development and advice.
A key finding of the report is of ‘something akin to a default consumption path…with consumption falling during retirement leading to savings in later life’. Interestingly, this pattern appears to be the same whether the consumer has a high or a low income.
The report goes on to identify that with the exception of those taking early retirement, expectations of lifestyle activities such as more holidays and travel are seldom met. A tipping point, between the ages of 70 and 74, seems to occur after which the average time spent alone at home increases, spending on non-essential items decreases and correspondingly savings increase.
Greater understanding of these issues is key to product development, and the findings of the report tend to support the suggestion that products need to meet a higher income requirement in the early years of retirement but lower guaranteed levels in later life – e.g. the drawdown and then annuity proposition. In addition, given the reality that the majority of savings made by older people tend to sit in low interest current and basic savings accounts, ‘the financial services industry should seek to understand how it can tap into this market to improve the returns that consumers are making on these savings’. Whilst the Treasury Pensioner Bonds available in 2014 for those aged 65 and over were a start, I would suggest far more needs to be done by both government and industry in this respect.
As far as policy is concerned, the report makes two further recommendations: that rules of thumb based on extensive research should be built into financial guidance processes for different consumer segments, and that there should be a mid-retirement financial health check and ongoing financial advice throughout retirement.
As far as financial advice is concerned, clearly helping consumers strike the right balance between flexibility and security in any de-cumulation strategy is of critical importance, especially since the chances of running out of money have been greatly increased by the Pension Freedoms. But in the light of this report, it would seem equally important that consumers have access to a mid-retirement health check at that critical tipping point when typical patterns of consumption tend to change and, for a significant minority, the spectre of funding care (either for themselves or their parents/older family members) raises its head.
But as the report also states, one-off financial health checks will seldom, if ever, be sufficient. Bringing financial advice to the mass market of all ages – whether face to face, on the phone or via the internet – is long overdue. In this regard, I will keep my fingers crossed that the Financial Advice Market Review will act to facilitate real change in this area to ensure financial advice becomes the preserve of the many rather than the few.