The future of annuities for the DC generation

Knowing how to take your money in retirement used to be easy even if the system was broken and needed fixing. There weren’t many options available and so the majority took their tax-free entitlement and purchased an annuity with the remainder, but at least people’s choices were tram lined by what the tax rules allowed.

However, this only really worked if people shopped around and understood their options. And a ‘once and done’ annuity purchase was unlikely to fit most people’s circumstances.

The ripping up of the retirement rulebook in 2014 might have given people total freedom and choice but it hugely increased the complexity of retirement decision-making. At the same time, it opened up an opportunity to develop solutions that better fitted with people’s needs.

A combination of moves

So what does the future look like? With annuities back in fashion thanks to recent rate increases, we think that people will increasingly use combined approaches to help secure their income. Meaning guaranteed portions of an income will be used to cover essential expenditure, with non-essential expenditure covered by drawdown. This allows people to balance out certainty and flexibility.

Furthermore, securing the guaranteed portion of the income could be undertaken in stages, to take advantage of improving annuity rates as people get older. As well as giving people flexibility, this could also act as a good inflation hedge.

An evolving market

This model could lead to better outcomes for people, both in terms of financial outcomes, but also giving people flexibility to adapt their approach as their plans change.

We believe that blended approaches will be the way forward as trustees and providers look to innovate in the ‘at retirement’ space. Solutions and approaches are evolving and developing, but where we really need to focus energy is on the choice architecture to help people with the decisions that they have to make. Access to advice is crucial here, but equally important is how we help and guide those that don’t access formal advice and what the potential role of default strategies could be to help anchor people’s decision-making in retirement.

No more cliff-edge decisions

We also need to think of retirement decisions as ongoing and move away from a ‘set and forget’ mentality. People don’t want to be making decisions on a yearly basis, but they do need flexibility to be able to adapt in a change of circumstances.

This will be a key challenge, especially as people get older and potentially become more vulnerable. But if we don’t crack this, then we’ll struggle to help people make the most of their pension savings.

To deliver great outcomes we need to innovate. ‘Freedom and choice’ is all very well but it doesn’t on its own deliver what people want more than anything – an income. We have to accept that as an industry we bear a responsibility to come up with solutions to help deliver a decent retirement.

Visit our website to find out how a Standard Life Pension Annuity could help your clients enjoy a guaranteed income for life.