Retirement Sentiment Index - Retirement Advantage

Retirement Sentiment Index Certainty


December 2015

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Foreword We asked over 50s straight out: what would you like from retirement income? They said two elements were key: certainty and flexibility. But certainty was what they’d take above all else. This report focuses on that desire for certainty. What it means for soon-to-be retirees, what it means for advisers, and what it means for those of us on the provider side of the retirement income industry. What we can conclude is, while the days of the traditional annuity for all might be over, certainty and a guaranteed income still very much have a place. This is the first in a series of four reports investigating the things that matter most to over 50s considering retirement. In a first of its kind study, it brings together hard facts and figures from multiple waves of a consumer survey with the insight of a hybrid think tank of consumers and advisers. It gives a unique insight into the retirement landscape as it looks today, and as it might look in the future. The Government’s reform of the retirement income market this spring was supposed to signal the beginning of the end for annuities. Flexibility was the order of the day, and the public would no longer be required to buy a product that while guaranteeing an income was also fixed for life. Putting the power of choice in the hands of the consumer is a move that revolutionised the industry. But, as the dust settled on the first few months of the brave new world we took the time to ask consumers, and some financial advisers as well, what they thought, and what they wanted to see as they looked out over the new retirement landscape. With a volatile stock market and anticipating at least a twenty year retirement, money issues are a big concern for over 50s. Speaking to consumers over the course of the summer we found that their attitude to risk, and the kind of approach they expect to take in order to generate a retirement income, shifts with the outlook for the economy.

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That’s why flexibility is valued too – for changing circumstances internally, and changing conditions externally. In our next report we’ll be tackling flexibility, in light of what we’ve found about certainty. Over the coming months we’ll also be looking at the desire for instant access, and the pursuit of income growth from retirement savings. Juggling these often competing demands, and offering ways to help people live the life they want in retirement is the challenge facing the industry as we develop products for this new retirement world. We hope this study will provoke and support debate about meeting this important challenge. Andrew Tully Pensions Technical Director Retirement Advantage


Summary of findings ‘What matters most…’

“ Certainty. Everyone wants that with their finances. Guaranteed income at a reliable level for

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the future.

Stephen, 56 years old

Certainty More than four in ten (43%) over 50s from our research rank certainty as the most important element they are looking for from their retirement income. When speaking to these soon-to-be retirees, we defined certainty as having a guaranteed regular income that won’t fall in value over the course of their lifetime, and that they have no responsibility for managing the money themselves. Speaking to a focus group of consumers we discovered what they think of their retirement income in terms of a hierarchy of needs. Things like housing, food, and utility bills are at the base, with things like holidays and hobbies building on top. Knowing they can pay for the essentials allows them to enjoy the luxuries.

“ The basics of life - food, clothing and a roof over one’s head must be the essentials. I would give up anything I have to ensure the essentials are covered.

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Essential Expenses Food Debt Gas, electricity, water

Holidays Entertainment Hobbies and interests

VARIABLE

Optional Expenses

STABLE

Joseph, 57 years old

Important Expenses Insurance Clothing Car maintenance

Occasional Expenses Long term care Repairs to the home Children’s weddings

Flexibility Flexibility – having some guaranteed income but the ability to manage the rest yourself – was the top priority for a third (34%) of over 50s. This tends to be thought of separately from that hierarchy of needs. Where over 50s want flexibility is in the case of the unexpected expense, or a change of circumstance. They worry about a big bill for a car, or to fix a washing machine, or mend a roof. Health concerns and the prospect of long term care do feature in their thinking, but this is very much in the back of their mind.

“ I do not want to have to worry about money, bottom line. I realise there will always be monthly bills, food shops, petrol etc. but want assurance that large appliance failures or cars going wrong would be covered. Tracy, 50 years old

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Instant access and income growth Just 14% of over 50s prioritise instant access to their pension savings – that is, the ability to take their savings and spend them whenever they want to – and less than one in ten (9%) prioritise income growth throughout their retirement.

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It is a concern that the market can change rapidly and so the pots we hold can drop. I will not put all my eggs in one basket. Joseph, 57 years old

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With volatile stock markets, inflation forecast to remain negative, and rumours of interest rate hikes, soonto-be retirees are concerned about the money they would like in retirement. Nearly half (46%) rank having enough money to do the things they want to do as one of the biggest issues facing them in retirement, compared to just over a third (37%) who are worried about health problems.

Priority elements in retirement income

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I would rate certainty as the most important thing about a pension. Knowing that I can exist comfortably… would ease my mind a great deal. Female online forum member – June 2015

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Top priority in retirement income for over 50s Percentage of over 50s

50% 45% 40%

35% 33%

35%

May 2015

30% 25%

August 2015

20% 14%

15%

8%

10% 5% 0%

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43%

certainty

flexibility

instant access

10%

income growth

Certainty is the number one priority for most people. Retirement brings all sorts of surprises, and over 50s rightly don’t want their retirement income to be one of them. But those surprises might also mean you need a retirement income that can change as your circumstances do – you might need to cover a big repair bill, or you might want to help a loved one make a big purchase – that’s why flexibility is so important. Andrew Tully, Pensions Technical Director – Retirement Advantage

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The environment

People do not make decisions in isolation; the external environment has a significant impact on how people feel about their retirement and therefore what they want to achieve from financial products. Consumers in our focus groups were clear that volatility in the wider economy worries them; inflation trends influence how they plan to meet the cost of living, and stock market performance changes their thoughts on how savings will grow. So we gathered data for a range of factors at the same time as over 50s were answering our questions, namely May and August, in order to consider how these external factors might be influencing their desire for certainty and flexibility.

Average annuity rates (Retirement Advantage)

0.5%

T

FTSE 100 6949

Increase or decrease in income being saved

GUS AU

0.5%

MAY

Up 0.1%

T

GUS AU

Up 0.1%

Stock market performance (FTSE 100) (26th May & 11th August)

Interest on savings (BoE base rate)

MAY

T

GUS AU

MAY

The cost of living (ONS CPI figures)

FTSE 100 6664

House prices (Halifax HPI - UK)

Annuities

56%

T

+2.7%

GUS AU

T

MAY

+1.94%

Not asked

GUS AU

+0.18%

MAY

T

GUS AU

MAY

Annuities

+3.3%

“ Big stories like Black Monday in China make me realise how vulnerable I am [financially] but I don’t

see what I can do about it. The advice is always conflicting - some say the story of the day spells disaster, others say it will recover. Who knows? Keith, 59 years old

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Expectations for retirement Not everybody approaches retirement in the same way, but we are keen to understand how the over 50s feel in general; how long they expect retirement to last, how much money they think they’ll need and what they plan to do with their retirement years. Some of the people we spoke to were clear that they hoped to stop working and spend their remaining years enjoying life without the stress of a 9 to 5 job. However, others were worried they might get bored and instead planned to continue working or volunteer for a local charity during their retirement.

“ I would like to be away from the daily politics of work and I enjoy travelling so hope I would have more time and money to be able to travel to other parts of the world. Phil, 60 years old

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Length of retirement May 2015

August 2015

Expect to retire at age

64 ¾

65

Expected to live to age

82 ½

82 ½

Expected length of retirement 17 ¾ years

17 ½ years

Plans for retirement May 2015

August 2015

Plan to work part time in retirement

47%

47%

Plan to do voluntary work in retirement

22%

21%

5%

5%

Expect never to stop work full time

Most important aspects of retirement finance May 2015

August 2015

Ability to pay my bills

70%

67%

Ability to go on holidays

56%

60%

Ability to start new hobbies

38%

38%

Ability to pay for long term care

22%

24%

“ The big problem is deciding what age we want to plan to, and what the cost of living is going to be between now and then. Tim, 62 years old

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Income in retirement Expect to need (after tax) income of

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May 2015

August 2015

£1,477.5 per month

£1,487.77 per month


Analysis Biggest issues when you retire

Financial concerns are clearly playing on the minds of the over 50s. Even with the UK’s economy growing, the over 50s are wondering whether they’ll have enough money to do the things they want to do in retirement. While this concern lessened between us first speaking to consumers in May and again in August, it remained their primary concern.

“ It’s the unknown, the unexpected, that will knock confidence; like an illness, a disaster with the

house and what if cost of living rockets - things you cannot possibly know year to year now, never mind in 17 years’ time! Tracy, 50 years old

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Biggest issues expected in retirement

Having enough money to do the things I want to do

The cost of living

May 2015

August 2015

May 2015

August 2015

49%

44%

31%

28%

Health problems

Losing a partner or spouse

May 2015

August 2015

May 2015

August 2015

37%

37%

23%

20%

The fear of health problems or of losing a partner or spouse plays on the minds of over 50s but in many cases, these things are beyond our control. Financial certainty, on the other hand, is something that consumers can have an influence on. Immediately following the arrival of April’s pension freedoms, and faced with the increased responsibility of managing their own retirement income decisions, nearly half (49%) of over 50s said that having enough money to do the things they want to do was one of their biggest issues. By August this had fallen to 44%, with concerns over the cost of living also falling, from 31% to 28%. We are currently experiencing a period of low inflation, with the figure even dropping into negative territory, so it makes sense that the over 50s currently feel slightly less concerned about the cost of living and having enough money in retirement. These external factors play a big part in defining thinking when approaching retirement. 7

Plans for retirement income How these concerns play out into the choices consumers are likely to make can be seen by asking them about their plans for generating a retirement income. For those seeking a guaranteed income, there was no change over the summer – with just under a quarter (23%) of over 50s choosing this option. While this significant minority would go for a pure guaranteed income approach, a larger proportion would consider some degree of guaranteed income as part of a mixed package. External factors can drive a desire for certainty – volatility in the stock market, or concerns over house prices – but they can also help convince over 50s to relinquish some of this certainty in favour of taking more risk for more reward. Seeing a period of low inflation, petrol cheaper at the pump, house prices on the up, can encourage this.

“ I would prefer a monthly income so that I will always be assured that money is regular and available.

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Female online forum member – August 2015

So, we asked over 50s to tell us what they would do with their retirement savings, if they were retiring today. We saw that between May and August over 50s began to feel more able to pursue a degree of increased growth from their savings, even where this meant trading in some of that certainty in order to get it. You can see this in the shift from taking a lump sum and using the rest of your savings to generate a guaranteed income towards leaving funds invested where they can continue to grow and drawing from them as you need them.

Approaches to retirement income, if retiring today

Take some of your pension savings as a lump sum (in addition to a 25% tax free lump sum) and use the rest to provide a regular guaranteed income. May 2015

August 2015

28%

23%

Use all of your pension savings (excluding the 25% tax free lump sum) to provide a regular guaranteed income for life. May 2015

August 2015

23%

23%

Take your whole pension fund as a lump sum up front to spend as you see fit.

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May 2015

August 2015

8%

8%

Keep your pension funds invested where they can continue to grow and make withdrawals, either at regular intervals or as and when I need it. May 2015

August 2015

37%

41%

Take your whole pension fund as a lump sum to re-invest in something other than a pension product. May 2015

August 2015

11%

12%

Don't know May 2015

August 2015

18%

18%


“ Clients vary depending on their outlook in life. Some want an income that covers their bills, so

they may be an annuity candidate. Other clients take the view that although they understand the annuity, it will not pay the income they need, so they are prepared to speculate on drawdown. Financial Adviser – August 2015

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Attitude to risk and financial advice

There is a corresponding increased appetite for a degree of risk in order to pursue some growth. However, very few over 50s are willing to take a large amount of risk in pursuit of a large reward. For most, while they will take some risk, knowing their money is safe and can provide an income is what matters most.

“ The problem in the pension industry as a whole is that clients aren’t aware how much they need

to pay in to actually get a reasonable level of income out the other end… to utilise a pension and have access to it for 30 years means a lot of planning and cost. Pensions and investments adviser – June 2015

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Attitude to risk with savings

I am not willing to take any financial risk May 2015

August 2015

27%

23%

I am willing to take a reasonable amount of financial risk, provided there is a good chance of a reasonable return May 2015

August 2015

26%

29%

I am willing to take some financial risk, but generally look for the safest type of investment, even if it means lower returns May 2015

August 2015

43%

46%

I am willing to take substantial financial risk to earn substantial returns – risk means opportunity May 2015

August 2015

1%

2%

Don't know May 2015

August 2015

18%

18%

The number of over 50s not willing to take any financial risk fell from 27% to 23%, while those willing to take some risk increased to 46% from 43%, and those willing to take a reasonable amount of financial risk increased to 29% from 26%. This attitude to risk is the background to the shift towards favouring drawdown rather than annuity options – and perhaps a response to taking a closer look at their savings and the sort of income they could generate with some investment growth. But, making the right choice and getting the most from your savings can be difficult, and there remains a reluctance to consult a professional financial adviser. 9

Reasons for not using a financial adviser

I’m put off by the cost

I don’t feel it is necessary

May 2015

August 2015

May 2015

August 2015

36%

39%

25%

28%

I don’t trust financial advisers

I don’t think it will bring any benefit

May 2015

August 2015

May 2015

August 2015

41%

35%

25%

25%

Amongst those who say they do not plan to consult a professional financial adviser, there has been a fall in those who say they won’t consult an adviser because they do not trust them – from 41% in May to 35% in August. The cost, and not feeling it is necessary to consult an adviser, are still off-putting factors for over 50s – almost four in ten (39%) over 50s are put off by the cost, more than a quarter (28%) don’t feel it’s necessary to consult an adviser.

“ A lot of clients who come to me really don’t understand pensions at all, let alone annuities, and it is really

quite worrying…unless they are an existing clients we have to explain everything in layman’s terms. Partner-level IFA - August 2015

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This suggests that in the new pension world, even though they are faced with more freedom about what to do with their retirement income, over 50s are still reticent of professional financial advisers and for many the value of financial advice is not yet being clearly articulated and our message is not yet getting through.

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Where will over 50s go for information about retirement?

May August Internet research

45%

44%

A professional financial adviser

43%

44%

The Government’s *Pension Wise* guidance service

39%

40%

My pension provider

29%

28%

Newspapers, television, or radio

14%

15%

Friends or family

15%

13%

My employer

9%

9%

Despite this, more than four in ten (44%) intend to speak to a professional financial adviser to get information about their options in retirement, with internet research (44%) and Pension Wise (40%) also popular options. Encouraging early engagement with the issues around retirement income and championing the role of financial advice, will be a vital parts of the new retirement world as our thinking continues to develop.

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Our research finds some quite significant shifts in the thinking of over 50s, even in the space of just a few months. The pension freedoms are making people think longer and harder about their options, and about what it is they really want from their retirement income. One thing is clear: the annuity, with the security of the guaranteed income it provides, isn’t dead. But, we do need to look at how we serve consumers who want both certainty of outcome and flexibility, in pretty equal measure. Soon-to-be retirees know they will need flexibility to cover unexpected events, and they know they will need to make their savings work harder to live the retirement they want to live. Maintaining that certainty, while allowing the necessary flexibility, has to be the central tenet of the retirement income industry as we develop and innovate in response to the new world. Andrew Tully, Pensions Technical Director – Retirement Advantage

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What have we learned? In this first report, we have focused on certainty and how that concept fits within the new retirement income world created by April’s pension freedoms.

1. Annuities are very much alive! The whole retirement income world changed this April, and suddenly – overnight - there were decisions to be made that didn’t have to be made before. For everyone – consumers, adviser and product providers – it meant looking again at the thinking around retirement income, and taking stock. This study, as the first of four, focuses on just one aspect of that, as we found that certainty still has a big role to play, and a regular, guaranteed income is still an attractive prospect for many over 50s. Put simply, while the idea of annuities might be seen as ‘so last year’, the value that annuities provide isn’t dead.

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2. The role of financial advice must be championed and its value demonstrated. More needs to be done to champion the role of financial advice in helping people make the best decisions and achieving the best outcomes from their retirement savings. Pension freedoms opened the door to many new options, and the name of the game is tailoring – finding the right option or balance of options to meet an individual’s circumstances. For most people, this is a bigger task than they can undertake themselves.

3. Flexibility is the next retirement income frontier. Certainty is what consumers look for first, but flexibility is what they look for second – finding a way to balance these desires is a challenge for us all. In our next report, we will be tackling flexibility, and looking at why that ranks so highly alongside certainty as what matters most from retirement income. Our study will look at how people are envisaging the course of their retirement – are they expecting the first five or ten years to be very different from the rest? Are they expecting to retire completely, or slow down gently in the world of work? We’ll find out what these changing expectations and the changing environment around them mean for what people want from retirement income, and how the industry can respond.

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Note on methodology The Retirement Advantage Retirement Sentiment Index is based data from the following sources:

• YouGov quantitative research oo Wave one: a survey of 1009 UK adults over the age of 50, with a DC pension but not yet in retirement. Fieldwork was undertaken between 20/05/2015 and 25/05/2015.

oo Wave two: a survey of 1001 UK adults over the age of 50, with a DC pension but not yet in retirement. Fieldwork was undertaken between 06/08/2015 and 11/08/2015.

• YouGov qualitative research oo Wave one: online consumer forum and focus group carried out in June and July 2015, and teledepths with financial advisers carried out in July 2015.

oo Wave two: online consumer forum and focus group, and teledepths with financial advisers, all carried out in August 2015.

• Office of National Statistics Consumer Price Index for May and August 2015. • Bank of England base rate for May and August 2015. • FTSE 100 market performance on 26th May and 11th August 2015. • Retirement Advantage analysis of average annuity rates for May and August 2015, where average annuity is calculated from average standard and average enhanced rates.

• Halifax House Price Index for May and August 2015.

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About Retirement Advantage

We are an established, award-winning company that can trace its roots back to 1852. In 2015 we changed our name to Retirement Advantage – merging our retirement income and equity release divisions. As specialists in retirement, we believe we understand the needs of our customers better. You benefit from a wealth of experience, industry expertise and outstanding customer and adviser service – and we’re known for building award-winning products. Every year thousands of retirees rely on us for their income. And with almost £1.8billion of funds under our management, and a heritage dating back over 150 years, you can trust us to keep your client’s money safe and secure.

The Retirement Account We recently launched the pioneering Retirement Account. It combines a Guaranteed Annuity, a Pension Drawdown facility and a Cash Account, all held within a single tax-advantaged wrapper written under Pension Drawdown rules.

Contact us To find out more about The Retirement Account, or our range of other products you can contact us on 0800 912 9945 or alternatively email us at [email protected].

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Telephone calls may be recorded for training and quality monitoring purposes. Retirement Advantage™ is a trading name of MGM Advantage Life Limited. Registered no. 08395855. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Retirement Advantage™ and the Retirement Advantage™ logo are trademarks of MGM Advantage Holdings Limited. Registered in England and Wales. Registered office MGM House, Heene Road, Worthing, West Sussex, BN11 3AT. 25-196 12/15

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