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Managing the retirement expectation gap

A Sapiens White Paper

By Jeff Denham, Stuart Hayman

Contact Details [email protected]

For more information please contact us at [email protected]

mailto:[email protected]

The retirement expectation gap

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Table of Content

1 The Challenge .......................................................................................................... 2

1.1 Mum and Dad appear to be enjoying their retirement? ...................................... 2

1.2 We are all working for longer ............................................................................. 2

2 The Realisation ........................................................................................................ 3

3 Retirement by stages – a new retirement Lifestyle reality? ....................................... 4

4 The continuous Life stages advice journey. .............................................................. 5

4.1 At last - help from the ABI ................................................................................. 5

4.2 Changing financial needs. ................................................................................. 6

4.3 Changing the one and done retirement process to a continuous Life stage re-

evaluation process ............................................................................................... 7

5 Lifestyle advice......................................................................................................... 8

5.1 Healthy part time working .................................................................................. 9

5.2 Bucket List Years .............................................................................................. 9

5.3 Full Retirement ................................................................................................ 10

5.4 Long Term Care .............................................................................................. 10

6 Whole of market access ......................................................................................... 11

6.1 Reaching the whole market ............................................................................. 11

7. Conclusion ................................................................................................................ 12


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1 The Challenge

1.1 Mum and Dad appear to be enjoying their retirement?

Good for them!

A decent state pension and of course a lovely Defined Benefit Occupational pension so

generously provided by their employers and perhaps even a Personal Pension set them

up nicely to make the most of their retirement; nice cruises, golf club membership, gym

membership, weekends away, meals out, new car etc.

Retirement is a period in life to look forward to, to do what I want when I want, after all

I’ve finished working so now is the time to sit back and reap the rewards of those many

years of working. ‘Your turn will come my son’

No it won’t.

It’s different now and that is NOT going to change, so prepare yourself for a very

different life style experience to that enjoyed by your parents. To put it bluntly it’s going

to be tough and you are going to have to accept change and prepare yourself for a very

different retirement experience to that enjoyed by your parents.

The vast majority of people will be aware of the challenges – successive Governments

have highlighted the issues associated with an ageing population, the fact we are all

living longer than previous generations, the economic fiscal tightening and the driving of

Defined Benefit schemes to extinction, but what are we doing about these challenges?

1.2 We are all working for longer The facts are that we will have to work for longer:

The Government is progressively moving the state pension age ever further out

with the state pension age set to increase to 68 by 2050.

Men and women are deferring their retirement and working for longer – the ONS

reported 1.4 million working past their state pension age in 2011.. 1

1 http://www.ons.gov.uk/ons/rel/mro/news-release/working-past-state-pension-age-nearly-

doubles-in-past-20-years/owlm0612.html


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More and more people are continuing to work after retirement age for a variety of

reasons. No doubt for a large number the main reason for working after retirement age

will be financial, but for others achieving a balance between work and home life is an

important issue. Some people do actually view the prospect of stopping work altogether

as a scary option and many will ease their way into retirement by continuing to work but

with more flexible or part-time hours.

In Britain around 10% of people over the state pension age are still in employment, and

there are around 6 million people between the age of 50 and retirement age still actively

employed. These figures show that for many people, working instead of retirement is a

desirable option and not just for financial reasons.

2 The Realisation

Relying on the state will not be an option

Self-provision is essential

Today’s retiring population have very different needs to previous generations of retirees

and above all, their attitudes and behaviours are radically different.


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3 Retirement by stages – a new retirement Lifestyle

reality?

A new model of retirement planning is evolving whereby the retiree segments their

retirement into different phases as follows::

Pre-retirement – the transition from full time work to part-time work: In the good

old days people worked for an employer until retirement from their late 50s to

early 60s , whereupon they would live for the rest of their days on two-thirds of

their final salary (index linked). Those days have now gone. It is much more likely

that our retiree will continue with some degree of part time work into retirement

(such as the “Homebase” grey generation).

Bucket list years – the expensive bucket list phase (fuelled by baby boomer

expectations, there is now a view that retirement is an opportunity to do all the

things that have been put off),a period of work and leisure time

Traditional retirement (Late retirement –Final Retirement). This phase needs

careful preparation to ensure that, as ‘earnings through work’ falls away, leisure

time becomes more fulfilling and is not limited by lack of funds. This is the stage

feared by many as they are beginning to realise there is no real prospect of

saving effectively for it. It is also likely to be the time when Inheritance Tax

Planning is done and the retiree needs to look to provide a windfall for the next

generation or two perhaps?.


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Care years – this is the time when one is likely to need part or full-time care.

Ideally retirees can put aside funds to support LTC plans or simply fund

necessary assistance to avoid being a significant burden on the next generation

at a time when they too may be facing larger financial burdens as they begin

building their own families.

For this to really work the retirement planning industry will need to get behind it and

develop new products to meet these different phases of Lifestyle retirement.

4 The continuous Life stages advice journey.

As Hal Rater says, the customer is ‘for life, not just until they retire’.2

The journey to and through retirement is dynamic and as such is not a single one off

advice event any longer.

Although improvements have been made following the compulsory code of practice

introduced by the Association of British Insurers (ABI), in order to stop consumers from

automatically rolling over their pension savings to an annuity with their current provider,

there still remains an element of inertia with many retirees, in part due to lack of good

advice and awareness after retirement. Under the new code, ABI ensure that customers

receive all the information they need to shop around in one easily accessible place – the

question here is, is that enough and is an annuity the right vehicle?

According to ABI figures, 46% of consumers in 2011 bought their annuity from a provider

that was not their pension provider, an increase from 35% in 2008. However, about a

third of people do not shop around, with inertia identified by the ABI as one of the key

reasons why people fail to shop around

4.1 At last - help from the ABI

For the first time ever those approaching retirement are able to compare sample annuity

rates from the UK's leading providers using a tool on the Association of British Insurers'

(ABI) website.

2 Hal Rater, The Future of Life and Long Term Savings Conference 2012


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The move forms part of the ABI's latest drive to improve annuity transparency as well as

encourage more people to shop around to find the best deal.

The ABI says the sample rates should not be considered the same as a best-buy table,

but have rather been designed to show those planning on buying an annuity how rates

can differ from provider to provider.

But is an annuity the right vehicle for the retiree at this time?

4.2 Changing financial needs.

We are all familiar and appreciate the need to re-evaluate our Life insurance and

Investment needs at each life stage to reflect our changing living needs. However these

Life stages are typically mapped from our 20’s to retirement and stop.


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4.3 Changing the one and done retirement process to a continuous

Life stage re-evaluation process

The above schematic illustrates the need to have regular reviews based on changing

events and behaviours (lifestyle) throughout the retirement period.

The increasing flexibility now afforded in today’s decumulation environment where

annuitisation is no longer a compulsory event means retirees now have the opportunity

to treat their decumulation years in a similar fashion to their accumulation years where

needs are regularly reviewed and income- decumulation strategies amended based on

changing circumstances and needs.

Over the past few years we have seen some positives in the decumulation product

space with Income Drawdown, Enhanced and Impaired Annuities, Flexible Annuities,

Temporary Annuities but more is needed to meet the dynamic and changing needs of

today’s retirees.

Not until the circumstances demand should once and for all decisions be made, after all,

retirees, just like those in the pre- retirement stage, do not know what the future holds for

them from a risk perspective so is it better to elect for an Impaired Life annuity when

serious illness occurs ? After all this is what TCF is all about!


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So whilst there is a need for product development to support a continuous re-evaluation

in retirement (our third paper in this series will discuss product in detail), this must be

underpinned by an ongoing advice relationship.

5 Lifestyle advice A really important feature of any ongoing retirement advice that is sadly lacking today is

a retirement “lifestyle fact find”. This enables the adviser to suggest an initial approach to

best using retirement funds and enables the customer to deploy differing retirement

vehicles to meet differing needs at the different retirement Life stages, as discussed

above. Regular fact finds or reviews, as described in 4.3, then give the retiree an

element of advice throughout the changing circumstances of their retirement. Advisers

providing periodic financial lifestyle advice throughout the retirement journey will of

course need to be remunerated as is the case with pre-retirement advice.

The fee structure to be agreed between the Adviser and the retiree could include:

A single advice fee for each periodic life style review

An annual fee - providing the retiree with the option of having annual financial

reviews and/or ad hoc reviews resulting from unforeseen changes.


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An option to pay for the advice from the decumulation fund. We look to

government guidance and in particular the GAD tables to identify what is an

appropriate maximum level of commission.

Advice structures and pricing that can be targeted to different market segments.

An adviser dealing with a large HNW fund would expect greater remuneration for

advice the periodic reviews of a small sub £50K retirement pot.

As we discuss in our product paper, making the retirement fund more visible and

transferable in retirement (we discuss investment portfolios and unbundled

annuities) will encourage the adviser to retain a relationship that could provide

with an income stream post retirement.

Specific advice can then be given in specific retirement phases, as described below:

5.1 Healthy part time working

An additional income to supplement part time working income, enabling one to continue

meeting their financial obligations and support their active life style. Retaining control

over their ‘retirement’ pot such that changes can be made to income requirements.

Advice

Supplementary income stream through tax efficient vehicle

Investment advice

5.2 Bucket List Years

An active period with some element of part time working during which there is an

expectation of fulfilling retirement dreams. This is typically an expensive period for active

retirees demanding a change in income.

Advice

Increasing supplementary income stream- temporary

Review of on-going investment advice

Review of life style changes – health, behaviours etc


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5.3 Full Retirement

A less active period brought on by advancing age with inevitable physical and mental

deterioration. During this period retirees income needs change again as the slowing life

style and potential ‘family changes’ including death of a partner are all risks which have

the potential to radically change behaviours and financial needs. Unlike the active

healthy retirement years where income flexibility is paramount to meet the dynamic

nature of needs and behaviours, full retirement is a period where Income guarantees are

typically required as retires behaviours and needs focus on long term income

guarantees

Advice

Long term surety of income

Investment options

Review of life style changes – health, behaviours, partner etc.

Impaired, Enhanced options

Review of retirement fund performance

5.4 Long Term Care

The later years of retirement are typically associated with poorer health and mobility,

demanding a greater dependency on care. This is a very expensive period, a period

demanding a review of all financial assets.

Advice

Residential, nursing

Equity release

Family support


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6 Whole of market access

6.1 Reaching the whole market

One of the biggest challenges facing the would be retiree who is looking for advice is

that of financial discrimination. It is very difficult to see a £20K retirement pot as being an

attractive proposition for an IFA to invest time and effort in. We therefore see an urgent

need to ensure that retirement advice reaches the whole market in one form or another:

IFA’s

On line

o MAS

o FCA

o Providers

o Employers – work place

o Etc

We understand the importance of regularly reviewing financial strategies to ensure they

are refined to meet personal changing needs and circumstances.

Individuals choosing to use the services of IFA’s are well positioned to realise their

individual goals, however there are many individuals who for whatever reason choose

not to engage with IFA’s and for those individuals’ alternative sources of advice must be

made available in an easy to understand format.

No one can deny the power of the internet and we know more and more individuals carry

out research on the internet ahead of buying goods and services. We would like to see

increased funding to services like MAS to ensure that mass market advice/guidance can

be provided, e.g. on-line helpdesks to answer simple questions for retirees.

As an industry we must make the decision processes through the retirement life stages

easy to understand, relevant and informative to all.

Many Providers already provide excellent on line help and advice as does the MAS,

however now is the time for Industry and Government to collectively work together to

provide current and future retirees with straight forward information and tools allowing

them to make informed financial decisions throughout their retirement years.


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The Pensions Regulator has been carrying sterling work in ensuring that workplaces are

well advised as to their obligations for the lifetime of the accumulation phase of a

pension with regards to the Auto Enrolment process. We feel that this can be extended

beyond the retirement date, and that there is a case for legislation and legislative

support to ensure that employers continue to support employees into retirement (albeit

subject to service restrictions).

7. Conclusion

Irrespective of whether one is financially aware and informed the managing of the

retirement expectation gap is real for all.

Helping customers choose an appropriate level of guidance and advice must be made

as simple as possible for everyone. Customers who are ‘comfortable’ and

knowledgeable and who have relatively simple retirement finances may feel happy

purchasing retirement products over the phone or the internet in a non-advised manner.

For customers who feel disconnected from the Financial Services industry easy access

to appropriate sources of information is required and here a non advised service may

well be the answer?

According to the Financial Services Consumer Panel the survival of commission and lax

regulation are fuelling a "significant shift" to non-advice in the mass market for annuities,

at the expense of professional advice, transparency and healthy consumer outcomes.

Annuitants in the mass market who shop around are looking for help. Many do not

actively seek non-advice services; they use them because these are the “shops” open

for business. Annuitants may not check the small print that mentions, “this is not advice”,

or, if they do, do not understand the ramifications. By taking responsibility for the

purchase, annuitants forfeit the right to a number of valuable consumer protection

services, such as recourse to the Financial Ombudsman Service (FOS). Annuitants do

not necessarily understand that non-advice services are not free (“commission

invisibility”).3

Now is the time for changes to ensure consumers are treated fairly.

3 FSCP


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The information, content or material herein is provided "AS IS", is designated confidential and is subject to all restrictions in any law regarding

such matters and the relevant confidentiality and non-disclosure clauses or agreements issued prior to and/or after the disclosure. All the

information in this document is to be safeguarded and all steps must be taken to prevent it from being disclosed to any person or entity other

than the direct entity that received it directly from Sapiens.

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