Flexible retirement

9th August 2010

Jonathan Watts-Lay is a founding director of WEALTH at work having been dedicated to its development since inception.  Watts-Lay has a sales and marketing background and holds both a MBA and chartered membership of the Institute of Marketing, He began his career at Nationwide Building Society where he progressed to product manager for mortgages and life assurance. Watts – Lay then spent more than five years working for SHL Group PLC, a leading HR consultancy.

What impact do you feel the removal of the Age 75 rule will have on the Group SIPP market?

JONATHAN WATTS-LAY: The removal of the age 75 rule for annuity purchase is likely to increase demand for group SIPP arrangements. Employers will seek to provide a pension arrangement that not only provides flexibility in the accumulation phase but also at the time employees begin to take their pension benefits. The group SIPP arrangement will support both the capped and flexible drawdown options proposed by the new government whilst also serving the needs of the many who will simply buy an annuity.

There is likely be new interest in the group SIPP market by those providers who may not currently offer a group SIPP anticipating an increase in demand. This is further supported by the removal of the default retirement age which in future will mean employees demand greater flexibility in how they take their pension benefits and as a consequence are likely to remain invested for longer making the group SIPP a more profitable product for providers.

How should these changes be communicated to members?

JONATHAN WATTS-LAY: Communication and education in relation to the change will need to be provided to ensure members are aware of the choices available to them. Currently many employees will simply be made aware of a single annuity provider at the time they take their benefits. In future, communication and education will need to reflect the flexibility of timing in relation to retirement but also the various income options available, both of which are interlinked.

It is unlikely that passive communication forms e.g. booklets will suffice in delivering the information members will need to make decisions. A formal process of financial education is required, starting some time before benefits are likely to be taken. The content will need to reflect the need for members to assess their overall financial position when making decisions particularly relevant for those considering drawdown options.

What do you see as being the main challenges associated with this change?

JONATHAN WATTS-LAY: A key challenge will be the changes employers and trustees will need to make to the choices presented to members to avoid the position where individual members may claim they have not been adequately informed and as a consequence have made an irreversible decision.

There will also need to be safeguards in place to ensure that those remaining invested via either of the drawdown options, do so in a responsible manner and are not unduly exposed to investment risk. The question of suitability is likely to be scrutinised in relation to any advice provided.

Providers will also need to consider the charges associated with the changes and whether the costs for updating existing product offerings are effectively passed on to members.

Do you think it will have an impact on how members choose to invest?

JONATHAN WATTS-LAY: Members should reconsider how they invest in light of the changes. Flexibility of timing as to when benefits are taken will require members to review existing investments particularly if they are currently set to be taken at a set date and in their entirety. Many will now be taking a longer term view. This combined with the removal of the default retirement age will increase the requirement for advice reflecting the objectives and desired outcomes of individual members.