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The contradictions of post pension freedoms

3 minute read

It’s been well over four years since Pension Freedoms. Over this period, it’s fair to say the industry has seen a mixture of foreseen and unforeseen consequences. Some of these have seemed contradictory in nature, but have nevertheless driven change in the market.

Flexibility vs Certainty

There’s no surprise, that in order to make the most of pension income flexibility, Drawdown has firmly replaced annuities as the solution of choice for those looking to take retirement income. With 58% of customers taking income opting for drawdown1.

However, there’s also been a counter movement towards certainty. With more people staying invested and drawing down income as required, there’s been demand from customers for reassurance that their retirement income will last as long as needed. FCA research surveying those reaching retirement found that avoiding losses was an important factor in the investment decision of 52% of people, versus only 34% for investment returns2.

This has led to innovation in investment strategies that look to mitigate the specific risks of drawdown, such as sequence risk and inflation. Clients in accumulation have time to allow their investments to recover from market falls but those in drawdown do not necessarily have this luxury. With sequence of returns risk, a drop in value in the early years of drawdown can significantly reduce how long a fund will last.

The industry has innovated to meet this demand. In 2017, the Investment Association introduced a new Volatility Managed sector, which now has just under 140 different funds3. And Scottish Widows’ research shows that of those advisers who place business in multi asset funds, over half have used volatility managed funds4.

With investment decisions relating to retirement becoming more complex, advisers give investment options as the number one reason they place pension and drawdown business5.
However, this need for flexibility in fund choice, is also countered by a need for more certainly in investment performance. This is shown by the focus on multi-asset funds, with a desire to manage risk and protect capital whilst targeting growth. Increased volatility, slowing economic growth and geopolitical uncertainty have led to fresh interest in multi-asset investing for the benefits it gives for diversification.

Client segmentation vs value for money

The introduction of ‘Prod’ rules in 2018 made it clear that firms need to put clients’ needs and outcomes at the heart of their decision-making processes, and demonstrate the appropriateness of their recommendations in relation to identifiable target markets. The industry is still getting its head around this, with research by the lang cat showing that the majority of advisers are aware of Prod, but over 2/3rds couldn’t evidence suitability of products and services by client segment to comply with the regulations6.

At the same time there’s been a clear focus on providing value for money. The Retirement Outcomes Review (ROR) has been ongoing for a couple of years, and whilst the focus is on non-advised customers, it’s a clear indication of the direction of travel for the FCA – clarity of charges and value for money.

Advisers could find complying with Prod brings challenges for evidencing the value for money they provide clients through their service and advice proposition. This has led to firms looking at ways to be more efficient and reduce transactional work so they can increase their focus on clients. In response, providers, both on and off platform, have looked for ways to deliver more time effective servicing to advisers. This has resulted in the digitisation of the service experience, but this only works best when done for the benefit advisers. A provider’s service proposition shouldn’t be reliant on digital alone and should be able to still deliver personalised service when required.

HOW SCOTTISH WIDOWS RETIREMENT ACCOUNT CAN HELP

Flexibility vs Certainty

Retirement Portfolio Funds – For just 0.2% (Total Annual Fund Charge) this fund range was developed to manage significant volatility to help your client’s drawdown pension pot last longer using our innovative Dynamic Volatility Management process.

Drip-Feed Drawdown – Our automated phased drawdown option, can save you time and help you manage your client’s tax affairs efficiently, by allowing them to draw the optimum amount of tax-free cash and income.

One Plan flexibility – Retirement Account offers true flexibility within one plan, from initial set up through to retirement and beyond, with flexible adviser charging, flexible client income options and flexibility to choose from our wide choice of investment solutions.

Client segmentation vs value for money

Straight forward servicing – we understand that our award winning service proposition needs to suit your business’s needs. Which is why you have options to self-serve online, or through our dedicated telephone number. Choose what works for you.

3 Core Multi-Asset fund ranges – Competitively priced at 0.1%, 0.2% and 0.4% (Total Annual Fund Charge), they offer potentially excellent performance at low cost. By keeping our charges competitive, we can help you deliver a low cost full advice model.

Easier online fund management – Control and manage clients’ investments with our signature free process to buy, sell or switch. Our Portfolio Management Service is an easy way to create and manage model portfolios and End State Switching, taking the hard work out of restructuring clients’ funds.

  1. Association of British Insurers, UK Insurance and Long-Term Savings, The state of the market report, 2018
  2. Retirement Outcomes Review Final Report, Customer Research, 2018
  3. Investment Association, Volatility Managed Sector, 2019
  4. SW NMG Multi Asset research, 2019
  5. SW NMG BQM research 2019
  6. lang cat adviser research (on behalf of Iress), 2018

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