The end of of compulsory annuitisation has thrown down the gauntlet to providers to meet the new needs of DC members investing to?and-through retirement. Sebastian Cheek looks at the early movers in this new area.
The revolution in UK pension provision is upon us. From 6 April those over 55 retiring with defined contribution (DC) pension schemes will be able to take their entire pot as cash, rendering the requirement to buy an annuity at retirement effectively redundant.
As Chancellor George Osborne so clearly proclaimed in the March 2014 Budget: “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits.” In this year’s Budget Osborne went one step further by allowing those who have already retired to join the party.
From April 2016 the government has proposed allowing pensioners to sell the income they receive from their annuity without unwinding the original annuity contract. They will then have the freedom to use that capital as they want – either take it as a lump sum, or place it into drawdown.
WHAT TO TARGET?
The radical package of changes ushered in by the government has shifted the asset management industry’s gaze on achieving good investment outcomes both to and through retirement. This is no easy feat given the 75 basis points (bps) charge cap also coming into force from 6 April and the general increase in longevity.
Some believe product innovation in DC may suffer as a result particularly as the 75bps is an all-in charge, so includes administration costs too. Yet the lure of increasing asset volume in DC is proving too tempting for managers to ignore. According to Towers Watson’s Global Pension Assets Study 2014, DC accounted for 28% of UK pension fund assets versus 72% for defined benefit (DB) in 2013. The future is bright, however, with global DC assets set to outgrow DB “in the next few years” after reaching 47% of total pension assets in 2013, up from 38% in 2004.
Widening out the options at retirement makes it difficult for trustees and employers to track which of the three routes members will take: withdrawing the whole pot as cash, entering into income drawdown or sticking with the annuity path. Initial surveys offer no clear direction of travel.
According to a survey by Ipsos Mori commissioned by Hargreaves Lansdown in October, more than one-in-10 savers with a DC pension said they would take their entire pension in one go. Elsewhere, Blackrock’s recent Investor Pulse Survey revealed roughly a quarter (26%) will opt to stay invested, nearly one-in-five (17%) plan to withdraw all of their pension and invest it elsewhere, while 28% were undecided.
SIZE MATTERS
The route members take will depend mainly on their pot size and saving enough in the first place still remains crucial. Anything under £30,000 is generally considered to be unfit for income drawdown and according to OECD data the average UK DC pot size is around £26,000. Meanwhile the gross replacement rates for the average earner in the UK from their pension pot is just 32.6% of pre-retirement earnings – compared to 78.5% in Denmark and an even more impressive 90.7% in the Netherlands. Expected income in retirement, however, paints a different picture. FT’s Silver Economy survey of 4,200 online readers over the age of 60 revealed 45% expected to receive 50-75% of pre-retirement income, 22% expected 75-90%, 17% expected 25% or less, and 16% expected 100%.
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