They say variety is the spice of life and, if that's the case, retirement just got a lot more interesting following the Government's recent changes to the annuities market.
The government's plan to stop pension annuities means a retiree can now draw their entire pension in one go, and as of next year, all retirees will have full access to their pension entitlements without any fear of penalty, e.g. retirement plans better suited to needs.
It is therefore predicted that, come this historic day, the annuities market may shrink to a shadow of its former self, and the wider investment industry should benefit. Unsurprisingly, I believe that the Structured Products market will be one of those beneficiaries.
For those less fluently versed in funds and investments, a retirement annuity is an income that is bought once with a pension pot and lasts for the rest of the holder's (annuitant's) life.
In order to explain the potential beneficial role of Structured Products in this scenario, we need to go back and look at the rationale for retirees to invest. A retiree's primary intention through investment is to provide a secure and increasing level of income during and throughout their retirement. However, given the low interest rate environment we are experiencing, combined with equally low GAD rates (rates from the Government Actuary's Department, which provides actuarial advice to a number of UK occupational pension schemes, this has proven to be an increasingly difficult task.
Therefore, retirees need to ensure their capital lasts longer and retains its power to provide long-term income, if and when required. But why, you might ask, are Structured Products in a prime position to do this relative to other financial products?
Let's look at the number of very different options available: a lifetime annuity; an arrangement paying you an income for the rest of your life, an impaired life annuity; dependant on your life expectancy, fixed-term annuity; providing a regular finite retirement income, investment bonds, offshore investment bonds, investment funds, property, direct equity investing, Structured Deposits or Structured Investments, and the list goes on. Or perhaps clients should be looking at a combination of all of the above?
But let's not confuse things...
Going forward, I believe that fixed-term annuities are likely to be the largest benefactors of the recent changes other than structured products. Given that they provide competitive rates of income with future GMAs (guaranteed minimum amounts), they'll happily benefit from increased mortality rates meaning that the future purchasing power of the remaining capital is retained. In a nutshell, a fixed-term annuity is a good choice if you want to keep your options open and you'll avoid locking in to a lifetime annuity at the outset.
In addition, clients are only locking in for a much shorter fixed period. The risks of course being that clients miss out on any lifetime annuity rates that may become available during that period or if rates drop dramatically during the fixed term period.
One could also argue that although lifetime and impaired life annuities provide a regular income for life, this income is currently relatively low and if escalating, even lower still. Although spouses and widows pensions are available as an option, the retiree does not have access to their capital and will not usually be able to pass on any remaining funds to family as an inheritance.
Although direct investing, funds and property have a place in a diversified portfolio, they are not usually suitable for a large proportion of retirees due to the inherent risks involved, especially given that clients are usually at this point looking to draw from their investments, not grow them.
The same can also be said of onshore and offshore investment bonds although the bonds themselves would tend to be used as nothing more than tax-planning tools with again, the investment strategy within them set up for an 'at retirement' client.
Going back to my specialism, Structured Products, an increasing number of investors should, and have started to, consider them as they search for income whilst looking to protect the purchasing power of their capital. Some Structured Products can provide relatively competitive levels of income with the return of capital linked to an underlying index. The index is usually able to fall by up to half before any capital is placed at risk. There are two schools of thought clients should consider when looking at Structured Products for income in retirement and they relate to both the income and capital repayments.
Structured investments and some deposits may seem more complex at first glance but, are no more complicated than other investments and it could be argued, are no more complex than annuities.
Whatever type of annuity, investment bond or structured product, the key is making the options clear to retirees and allowing them to make an informed decision, and for the right reasons...