Blended retirement products are the future, according to industry commentators such as Mel Kenny, chartered financial planner for London-based Radcliffe & Newlands.
He said low annuity rates and pension freedoms have steered the industry into providing solutions that meet essential, desirable and bequeathing needs.
Mr Kenny said: “This has been done as a cost-effective, all-in-one solution for those with smaller pots of money, through to advisers breaking it down into the individual components for larger amounts of pension savings where feasible.
“But for many savers, their entire pension would be used to meet essential needs, and the default income solution of a lifetime annuity is a bitter pill to swallow given the miserly annuity rates on offer. Pension freedoms enable these savers to top up their income, but it opens up longer-term income risks for those with it.”
The demand for blended retirement products is often seen as an indication that clients are becoming more aware of the alternatives to standard lifetime annuities.
It also follows on from April 2014, when George Osborne, the chancellor at the time, announced that people would have greater flexibility when taking their pensions funds.
These changes came into effect in April 2015 and have already prompted many retirees to reconsider their retirement choices.
In the past, the pensions market offered two options. The majority traditionally bought an annuity, which guarantees income for life. But on the downside, there is a lack of flexibility should a person’s circumstances change. Also, there is little benefit upon death to the person’s family.
Key points
- The demand for blended retirement products is an indication savers are becoming aware of alternatives to annuities.
- Several providers have launched hybrid products that contain both a self-invested personal pension and an annuity.
- People can take responsibility for shaping their income in retirement to best suit their needs.
Income drawdown
The other option, which was traditionally chosen by a minority, is to take an income drawdown. This offers flexibility, as it allows income to go up and down. But the downside is that the retiree can run out of money, which makes it a riskier proposition.
Now there is an increasing interest in marrying the two. To accommodate this, several providers have launched hybrid products that contain both a self-invested personal pension (Sipp) and an annuity.
This comes as no surprise to research analyst firm Spence Johnson, which predicted that providers will draw on their annuity and drawdown offerings to create blended products that balance certainty and flexibility in packaged solutions for the mass market. It added that advisers will also create blended solutions for both large and small pots.
It said pension freedoms will continue to drive rapid change in the UK pensions market, as it grows from £699bn in 2014 to £1.1trn by 2024.
Rob Kelly, an analyst at Spence Johnson, said retirees’ two main demands from their pension are certainty of income and flexibility to access their funds as they wish. But these are often in conflict.
He said: “Blended products, by combining an annuity with an investment to draw down from, are one solution. The annuity can provide a certain minimum level of income, while the drawdown account remains invested and can be flexibly accessed.
