Chapter 5: How can we help our Retirement Nation?

We need to help people make the most of their retirement – and that means in all areas – emotional, health and financial. In particular, we need to understand their hopes and fears about retirement, and how to help them control their lives and enjoy the freedom of retirement.

Preparation

There’s evidence showing that, generally, there is a lack of preparation for retirement. 54% of non-retired UK adults are ‘not at all prepared’ for retirement [MGM Advantage July 2011] and 24% do not know what savings or investments will provide them with an income in retirement [MGM Advantage October 2011]. This demonstrates a high level of apathy and uncertainty for financial retirement planning.

Part of the problem is that people are unaware of the choices they have or the decisions they face. The range of financial products available to provide retirement income is growing, but the Retirement Nation seems unaware of the choice available in this market.

“I’m not at all prepared for retirement” (54%)

Only 29% of people in our survey were confident they knew exactly what an annuity was. This is worrying as most people use annuities to turn their pension savings into an income. Therefore, the majority of our survey would have either been faced with the decision of buying an annuity over the past few years, or they will be in the very near future. Women were less sure than men, with just 20% confident they knew exactly what an annuity was compared to 39% of men.

Financial advice

Fewer people are seeking independent advice than they were three years ago (14% in 2011 compared to 16% in 2009) [MGM Advantage July 2011]. And part of the problem is the supply of financial advice is falling. The number of Independent Financial Advisers (IFAs) who would be willing to advise clients with less than £50,000 in their pension fund has fallen in the last year from 56% to 44% [AFIA October 2011].

Because of this, there are a growing number of people who will have to make their own decisions about how and when to use their pension fund to secure a retirement income. The financial services industry therefore needs to find other ways of communicating with these people and helping them through this difficult life-changing decision.

Securing a retirement income

Using pension savings to secure a retirement income is tricky, and there are many risks and areas people need help with. They need a solution that means their income won’t run out, regardless of how long they live, and one that can cope with rising inflation. This is against a backdrop of falling annuity rates, meaning people are receiving less annuity income for their pension pot than they would have a few years ago.

There are growing concerns that too many people are simply sleep-walking into buying a standard annuity with their pension provider, rather than considering other products and other suppliers. Generally, people can use their pension pot to buy an annuity or a different type of retirement product from a range of providers.

We need to do more to equip the Retirement Nation in understanding their choices. There are numerous new retirement income products being brought to the market, which can help manage the risks people face in retirement, such as inflation.

Standard annuities are becoming less attractive as the default retirement income option and fewer people are buying them. This is due to a combination of factors, the most influential probably being falling annuity rates.

“Too many people are simply sleep walking into buying a standard annuity”

Instead of buying a standard annuity, some people may be better off buying what’s known as an enhanced annuity. This pays out a higher level of income, on average 23% more than a standard annuity [MGM Advantage October 2011], where people have certain medical conditions, such as high blood pressure, high cholesterol, or diabetes. The table below gives more information about the possible extra income people can receive each year.

Our survey showed 72% of the Retirement Nation were unaware that certain medical conditions could entitle them to a higher level of pension income through their annuity provider. As this option could benefit many, we need to make sure people are more aware of enhanced annuities.

In 2010, only 20% of all annuities sold were enhanced annuities [ABI 2011], even though our research shows over 50% of people have a medical condition that could qualify for an enhanced annuity.

Shopping around

When people do buy annuities, they need to be aware they may get a better price if they buy their annuity from a different provider than the company they saved their pension with. It’s important therefore to shop around, and take advantage of the ‘Open Market Option’ (OMO), which allows people to buy annuities from any provider.

Shopping around can mean receiving significantly higher incomes. The average difference in the income paid between the top and bottom quartile annuity (for both standard and enhanced annuities) rates is 18.56%. And over the average retirement this would build up to bring in an additional income of £9,881 for men and £10,569 for women, on a pension pot of £50,000 [MGM Advantage October 2011].

But worryingly, our survey shows many in the Retirement Nation are unaware of this option. Almost a third (31%) had not heard of the open market option, showing that shopping around still hasn’t got the coverage it needs. People are already, to a large degree, comfortable with the concept of shopping around, for car insurance, bank accounts, or energy suppliers. It shouldn’t therefore be too problematic to extend this principle to annuity providers, and so make a real difference to people’s retirement income.

We believe more needs to be done to support the work that the Government, the Association of British Insurers and the Pension Income Choice Association are doing to make it as simple as possible for people to shop around at retirement.

Example:

A man aged 65 years old has £100,000 in his pension fund. His pension provider assumes he is 100% healthy and offers him £500* a month for the rest of his life as income.

An enhanced annuity can provide approximate additions to this monthly amount**:

Inertia

However, the Retirement Nation shows a high level of inertia when it comes to financial matters, which will explain why so few shop around for an annuity. Often, they are too accepting of their current situation and do not believe they can change it. The roots of this inertia are embedded in fear, lack of trust in financial services, products that are too complicated, and the fact they often don’t know where to start or where to go to for help.

The financial services industry, together with the Government, needs to tackle this inertia head on. There needs to be a two-pronged approach:

We need to educate people, to make sure they understand why it’s in their interests to shop around.
We also have to make sure people understand and do not fear financial products. They need to be designed with the customer in mind, and be simple, accessible, and offer good value.

For Chapter 6 and our recommendations please read more here.

For the complete Retirement Nation report please download Our Retirement Nation 2011 (1.9mb)

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