OECD Pension Outlook 2016 - Retirees in need of better support
The OECD’s Pensions Outlook 2016 report argues that individuals should buy an annuity not with all but at least some of their retirement savings to protect themselves against longevity risk. The report also suggests, amongst other things, that defined contribution (DC) pension scheme design must be improved and that given the growing individual responsibility to make effective retirement decisions, there is much greater need for people to take financial advice.
The new pension freedoms have dramatically changed the way people are taking their pension benefits. Far fewer are now buying annuities and more are either cashing-out or remaining invested into retirement. This change has left more people exposed to longevity risk – the risk they will out-survive their pension fund.
Nobody can predict longevity and an annuity, for most, will be the only way to mitigate the risk of living too long. For most therefore it is not whether but when to buy an annuity. For our clients, we look at drawdown exit strategies between the ages of 70 and 80, the ‘decade of annuitisation’, when annuity rates are generally much higher.
Pensions and retirement planning are relatively complex. In addition to longevity risk, those remaining invested must also tackle inflation, withdrawal and investment risks; not to mention avoiding the ever-growing number of pension scams. Mistakes are easy, expensive and often irreversible and as the report highlights, it is vital we improve consumer access and take-up of financial advice.
We are seeing evidence that a number of people are using drawdown who either don’t want to take on investment risk or are not in a position to take on the necessary investment risk. For many of these people annuities will be the right answer. Again, we must improve take-up of financial advice to help people make effective decisions and shop around for the best option.
Many DC pension schemes are still catching up with the new pension freedoms and have considerable work to do. One of the main areas that requires focus is the pre-retirement investment options. Many schemes still offer a traditional ‘lifestyling’ or ‘target date’ approach predicated on people buying an annuity at their retirement date. But people are simply not buying annuities and many are therefore finding they are holding entirely the wrong investments at the time they want to draw benefits.
While annuity and cash-out investment glidepaths are effective for people who should actually buy an annuity or cash-out, they are less effective for those looking to enter drawdown. Drawdown is not a one off transaction like an annuity purchase but instead is a series of cash and income withdrawals that will be different for every user.
‘One size fits all’ doesn’t work for people under the new pension freedoms and greater personalisation is needed. Regulated financial advice holds the key to delivering the required personalisation and helping more people achieve a good retirement outcome.