Are annuities, drawdown and cash enough to enable good outcomes?

Pardon the Interruption

This article is just an example of the content available to mallowstreet members.

On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.

All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.

Defined contribution savers need greater support in the pre-retirement and decumulation phase to achieve good outcomes, a panel of policymakers and lobbyists has said, with more guidance, blended products and collective defined contribution all being mooted as part of potential solutions. 
 
Many DC savers still enter into flexible drawdown without taking advice or guidance, focusing primarily on the 25% tax-free cash available at retirement – some even cash in their entire pot. 
 
In response the Financial Conduct Authority, though stopping short of a decumulation default, has sought to steer savers towards products with a greater likelihood of good outcomes by mandating that providers offer four so-called investment pathways, but industry and some policymakers feel that more still needs to be done. 
 

Blended products – help or hindrance? 

 
The Pensions and Lifetime Savings Association has been calling for the introduction of ‘guided retirement income choices’, a system of support and guidance at retirement that includes signposting as well as product innovation, by blending the existing options of annuities, drawdown and cash. 
 
“Most people currently don’t have the financial understanding to handle the complex decisions they face. They focus on tax free cash, postpone complex decisions, take the path of least resistance, and few shop around,” said Alyshia Harrington-Clark, head of DC, master trusts and lifetime savings at the PLSA, speaking at the association’s Annual Conference on Tuesday. 
 
She said blended products could help savers manage complex trade-offs and also wants to see efforts to engage people long before they receive their wake-up pack. 
 
The Department for Work and Pensions appears open to these suggestions; Pete Searle, director for private pensions and arm’s length bodies at the DWP, said the department is keen to explore blended products further in the coming months.  
 
But while he acknowledged that for some, a more blended approach could be valuable, he added that broadly speaking, the cash, annuity and drawdown option set “feels right to me”. He argued that for most people it covers what they need and that additional products could introduce further complexity. “I would caution about making things too complex. What may be suitable for some, maybe those with larger pots, might not be suitable for all,” he said. 
 
Despite this caution when it comes to new products, he said CDC could in future play a role in decumulation given their risk pooling capacity. While in the short term, the DWP has focused on the single employer model, “next year we will move on to thinking about where next for CDC and I do think decumulation is an area where they could add real value”, he added. 
 
While some would like to see the government’s free guidance service for over-55s, Pension Wise, take on a role in delivering pension guidance to more people than are currently using it, Searle said a balance needed to be struck between providing guidance to more people and making sure the people who receive guidance engage with it – “otherwise it’s just a cost with no benefit”. Big variations in pot sizes also mean guidance is not equally useful for everyone, he noted. 
 
The DWP does not want to deliver better guidance alone, however, and instead hopes to work with employers – some of whom do “less than they might”, said Searle – as well as schemes and the industry more generally, “to get them to do more to support their members to get the right guidance at the right time”. 
 

'Challenges and costs’ to higher guidance take-up 

 
Chair of the Work and Pensions Committee Stephen Timms said a lot of the evidence submitted to the committee’s pension freedoms inquiry agreed that the available options of cash, drawdown and annuities are between them enough to meet people’s needs, and that there have also been suggestions that CDC would improve things further.  
 
Combining existing options rather than just take one of them “can be hard to do”, he said, but added that the PLSA’s ‘Guided retirement income choices’ were an interesting idea. 
 
As for guidance, he said the committee has previously taken a view that increasing Pension Wise take-up is a good thing but said there were “challenges and costs” involved in this. A ‘midlife MOT’ - a pensions check earlier in life - “could well help people prepare ahead of decisions on how to access pensions” he said, while the pensions dashboard "will help [savers] take decisions as well”. 
 
Having “some form of guided retirement income product is the right way forward”, said Tim Gosling, head of policy at master trust the People’s Pension, as asking people to predict how long they will live – as is the case in the current system – is simply not possible. Industry and policymakers need to approach the problem differently, he suggested: “It comes back to making the product fit the person, not the person fit the product.” 
 

How will the decumulation market need to evolve to meet savers’ needs? 

More from mallowstreet