Rethinking retirement in the UK - Aviva › content › dam › aviva-corporate › ...Aviva Real Retirement Report 7 2.5 Rethinking Retirement in the UK sets out a number of key changes

Rethinking retirement in the UK

RETHINKRET_V1_30854_BRO.indd 1RETHINKRET_V1_30854_BRO.indd 1 23/05/2011 13:3123/05/2011 13:31


Contents

1. Foreword 4

2. Executive summary 6

3. Introduction 8

4. Aviva’s proposals

The Open Market Option 10

Creating an annuity market fit for the future 12

Addressing customer needs 14

5. Conclusion 16

6. Glossary 17


1.4 Bluntly, the products and services available to savers as they approach and enter their retirement are failing current pensioners and this will only get worse as greater numbers of people retire each year. The market needs to evolve to meet the needs of the current generation of retirees, who are facing the twin issues of increased longevity and reduced income.

1.5 The recent publication of the Government’s Green Paper on moving to a simpler, flat rate state pension is a great step in helping people understand what benefits they’ll be entitled to when they approach retirement. But it is remains hugely important that customers also have access to better information and easier ways to maximise their pension pot.

1.6 Customers need the industry to provide simpler ways to shop around for a retirement income, lower costs to amalgamate their small pension funds into one and holistic advice on all the financial issues surrounding retirement.

Foreword

1.1 The face of retirement is changing. People are living longer on less money.

1.2 The current retirement framework dates back to the time when the majority of people had a defined benefit company pension scheme, giving them a security of income which is lacking for today’s retirees.

1.3 Future pensioners face a very different retirement landscape. Few have a final salary pension scheme from their employers and many will have a number of small pension pots from different employers accumulated over their career. This fractured retirement planning means people face a retirement income often significantly smaller than their current wage, leading to more reliance on the state and growing levels of debt and poverty. Others will find they cannot afford to retire at their chosen age and are forced to work for a number of extra years to build up their pension pot or perhaps pay off debts.

The market needs to evolve to meet the needs of the current generation of retirees, who are facing the twin issues of increased longevity and reduced income.

1.7 Aviva is uniquely placed to kick-start the debate and lead the change. We are the only insurance company in the UK that is actively engaged in all areas of retirement saving, income and planning by offering consumers ways to:

● Save for retirement through personal and group pensions and investments.

● Manage their finances into retirement with a full suite of retirement products – the At Retirement range.

● Access a range of retirement advice services.

4 Aviva Real Retirement Report

Customers need the industry to provide simpler ways to shop around for a retirement income


Aviva Real Retirement Report 5

1.8 Aviva has long campaigned to help customers understand they can shop around to buy a retirement income – what insurers call taking the ‘open market option’ - and to make it clearer that they do not have to take an annuity from the company they have saved with. We have run multi-million pound marketing campaigns in recent years urging retirees to shop around and invested in improving our services to help customers navigate the complex decisions they have to make at retirement.

1.9 We have also championed the needs of pre- and post-retirees though our Real Retirement Reports, which for the past year have tracked the attitudes and financial concerns of people approaching and in retirement. We have used these findings to add to the national debate on retirement to ensure any new services or initiatives are built around the needs of the very people who will use them.

1.10 We are also seeking to stimulate debate and action that encourages people to save enough throughout their working lives to meet their aspirations in retirement. Our Mind the Gap study, published in autumn 2010, called attention to the savings gap and suggested actions governments could take to help address it. Our Future Prosperity Panel has brought together thinkers across the world to build a greater understanding of the financial issues affecting our customers, and what can be done to make a difference in the future.

1.11 Now the debate needs to translate into actions. Rethinking Retirement in the UK sets out a series of measures we believe are necessary to address the issues facing the market today so it can properly serve the needs of tomorrow’s retirees. It is up to all of us - the retirement industry, government, regulators, employers and individuals alike - to act on these solutions now to help provide prosperity and peace of mind for future generations of retirees.

Andrew MossGroup Chief Executive, Aviva

Aviva has long campaigned to help customers understand they can shop around to buy a retirement income



Executive summary

2.1 The UK is facing a significant population change with increasing numbers of older people coming up to retirement. But the current retirement market is already failing today’s generation of retirees and will continue to do so with serious consequences for the retirement income and security of future generations of older people. To put this in to context, 385,000 people purchased annuities in 2010 alone and figures indicate that only 32% of customers bought annuities from a different company to the one they saved with.

2.2 There are inherent weaknesses in the current system, such as the potentially high cost of moving between pension providers and the fact that some companies choose not to make their annuity rates publicly available for comparison. These weaknesses have shaped today’s retirement environment, where shopping around for the best deal isn’t the universal action it should be for customers.

2.3 However, there have been a number of Government initiatives aimed at meeting the current and future needs of retirees. The removal of compulsory annuitisation at age 75 has given a small proportion of retirees more freedom to use their savings and assets in retirement to best match their income needs. From October 2012 onwards, automatic enrolment into pensions will be introduced and the new National Employment Savings Trust (NEST) could offer pensions to as many as six million people. And the Government’s Green Paper on moving to a simpler, flat rate state pension in the future is a great step in helping people understand what they’ll be entitled to when they approach retirement.

2.4 To meet the needs of tomorrow’s customers, Aviva believes that the market must have full transparency, making it easy for customers to compare best rates and giving them access to the right annuity for their circumstances. To achieve this, it is crucial to ensure customers can easily get the right type of advice to suit their needs and can automatically access to enhanced rates through the introduction of fully underwritten annuities.

There are inherent weaknesses in the current system, such as the potentially high cost of switching and the fact that some providers choose not to make their annuity rates publicly available for comparison.



2.5 Rethinking Retirement in the UK sets out a number of key changes Aviva believes are vital to make it easier for customers to understand their financial options as they approach retirement and help them choose the retirement income they deserve. We believe that the required changes are:

Proposal 1: Requiring all annuity providers to publish annuity rates to make it easier for customers to make comparisons.2.6 UK annuity providers are not currently required to publish the annuity rates they offer to their customers when they reach pension age. Many companies already do so – especially those that are actively marketing their annuity products to new, or ‘external’, customers – but there is still a secretive significant minority allowing no comparisons. Aviva wants the publication of annuity rates to be made compulsory - no matter whether the provider is offering annuities to the whole, ‘open’ market, or takes a ‘closed’ approach by only serving the customers that have saved for a pension with them. Aviva also proposes that examples of the best market rates are highlighted to soon-to-be retirees when the annuity they are being offered by their pension company is 10% less than the best rates available in the market for the same type of product.

Proposal 2: Including medical questionnaires in maturity packs to drive access to automatic underwriting in annuities.2.7 One of the most noticeable changes in the retirement market over the past few years has been the rise in the number of enhanced or impaired life annuities. Aviva proposes that basic medical questions are included in all customers’ pension maturity packs to ensure those who qualify for an enhanced or impaired annuity are more easily identified by the industry so firms can automatically offer them a tailored annuity.

Proposal 3: Reducing the costs of switching providers2.8 When the FSA’s Retail Distribution Review is implemented in 2012, the way customers access advice and guidance about their annuity is likely to split into two broad sections. We believe customers need to be clear on what the right advice or guidance model is for them, based both on what they can afford and what level of service they want and are willing to pay for. In addition, we believe that non-advised annuity sales should be subject to the same cost transparency rules as advised sales.

Proposal 4: Streamlining customers’ retirement savings2.9 As switching jobs every few years is now the norm for most, people are increasingly contributing to several private pension schemes during their working lives. Aviva research suggests that one in three workers (30%) have five jobs throughout their lifetime. We therefore believe legislation should be introduced to allow the automatic transfer of small auto-enrolled pension pots, so savings pots follow members when they move jobs.

Proposal 5: Helping customers choose an appropriate level of guidance and advice2.10 Aviva believes it should be as simple as possible for every customer to choose the level of support they need when making financial decisions about their retirement. To bridge the gap between non-advised, direct purchases, and full independent advice, Aviva believes the industry and regulator should press ahead in developing ‘simplified advice’. We also suggest a new form of adviser ‘badge’ is created and promoted to customers so they know that if they talk to a ‘retirement adviser’ they will be able to create a plan that addresses all their financial needs.

Aviva believes it should be as simple as possible for every customer to choose the level of support they need when making fi nancial decisions about their retirement.


4 Aviva Real Retirement Report, May 20115 Syndicated “At retirement Survey”, in conjunction with Marketing Sciences, August 2009

1/2 National population projections,2008-based – Office for National Statistics3 DWP press office, March 2011


3.1 The world is changing and the way the retirement industry works needs to change with it. People are living longer and the average age of the UK’s population is rising. According to the Office for National Statistics1, over the last 25 years the number of people aged 65 and over increased by just over 1.8 million, and the proportion of people over 65 is projected to increase from 16 per cent in 2008 to 23 per cent by 2033.

3.2 Over the same period, the percentage of the population aged 16 or under will decrease from 19% to 18%. Old age support ratios will therefore fall - in 2008, there were from 3.2 people of working age for every person of state pensionable age in 2008, and this is expected to fall to 2.8 by 2033 – even taking account of future changes to state pension age.

Increasing life expectancy in the UK’s ‘Oldest old’ (over 85)

3.3 The current life expectancy for a man age 65 now, is to live for another 17.6 years, while a woman of the same age can expect to live for a further 20.2 years. But men born in 2009 are projected to live for 88.7 years and women for 92.3 years2.

3.4 While this is great news for individuals, the ageing population has huge implications for society as a whole, as current pensions and benefits are funded through tax and national insurance receipts paid by those currently in work. Currently 11.3 million people receive the basic state pension3. As those in receipt of a pension and other retirement benefits increases, and the number of working people falls, the government of the day will find itself increasingly unable to provide a living income to all those people in retirement.

3.5 The statistics mean people coming up to, or newly retired, face a raft of financial problems. Not only are they unlikely to have the security of a decent defined benefit pension scheme, they also face falling property values, historically low savings rates and a government that is unlikely to be able to pay a meaningful state pension over the full term of their retirement.

3.6 So what is being done to help people make the most of their savings and investments? There are currently products readily available such as annuities and equity release that allow people to maximise their income in retirement. However the problem is that timely, useful information is not always reaching people and encouraging them to take the steps needed to effective retirement planning.

3.7 Of course, making the best of use of their savings, investments and assets is just one part of the financial planning people need to do to have a secure and comfortable retirement. Aviva research found that the largest single source of income for the over-55s is the state pension (61%)4, but at the moment two thirds of people (68%)5 don’t know or overestimate its value.

3.8 The Government’s recent Green Paper on moving to a simpler, flat rate state pension is a great step in helping people understand what they’ll be entitled to when they approach retirement. Moving to a simpler system will help address this confusion and with a greater understanding of what individuals can expect from the state, people will be better placed to plan their private savings.

3.9 Additionally, from October 2012 onwards, automatic enrolment into pensions will be introduced. As well as an increased number of people saving into existing schemes, the new National Employment Savings Trust (NEST) could offer pensions to as many as six million people – those aged 22 or above earning more than £7,475. Any current employee without access to a good-quality occupational pension will be auto-enrolled, though they do have the option to opt out. They will have a 4% contribution deducted from their salary, with their employer adding at least 3% and the Government 1% to bump it up to a minimum 8%. While not a perfect solution it should encourage those people to save for their retirement who may not have done so without the new system.

3.10 The current generation of newly retired or soon to be retired also find themselves part of a new phenomena defined as the sandwich generation. They face pressure to care for their own parents and to help their children either financially or through care of grandchildren leaving them squashed in the middle.

660,000

1984 2008 2033

1.3m

3.3m

Introduction

Retiring with Aviva:Over 680,000 retirement customers £20 billion retirement funds under management Over 24,500 new annuity customers came to Aviva in 2010 £1.4 billion paid out each year to UK retirees by Aviva



3.11 Aviva has been tracking the attitudes and issues facing pre and retired people for over a year through our quarterly Real Retirement Reports. These reports divide older people into three distinct group – pre-retirees aged 55-64, newly retired aged 65-74 and long term retired aged 75 years or more, recognising that people at different times of their retirement will be facing different issues. Currently almost 18 million people – 29% of the UK population - are over 55, so their views are increasingly important.

3.12 Financial worries dominate all of these age groups and for good reason. The March 2010 report reveals that, year on year, their average income has fallen by 4%, the level of mortgage debt carried into retirement has increased by more than £10,000 to £65,107 and the number of people with a savings pot of less than £500 jumped to nearly a third over the year.

3.13 The research reveals the paucity of many people’s retirement income provisions. A state pension is the largest source of income for 61% of people aged over 55, with a work pension providing the bulk of their income for 38% and earned income and wages being most important for 36%.

3.14 Differences can be seen in the amount of savings each of the age groups have. While 30% of the retired age groups – 65 plus - derive an income from their savings, more than a quarter of pre-retirees has no savings. Only 14% of those already retired claimed to have no savings.

3.15 Debt is also an overriding worry – especially for an age group that no longer typically has the capacity to continue earning. The March 2010 Real Retirement Report revealed that one in seven do not think they will be able to pay off their debt in their lifetime and almost a quarter believe it will take them until they are at least 75 to be debt free. Credit card borrowing is the most common debt, owed by around a third of each age group – with an average balance of £3,311, though the largest debts are through personal loans at an average £5,983.

3.17 Previous generations of retirees typically had less complex financial choices – retiring with a more stable state pension system, greater numbers of final salary schemes, and typically with fewer pension pots to juggle due to having fewer jobs or careers in their working lives. But today retirees face a more complex range of choices. The growth of defined contribution schemes leaves individuals having to make choices about the type of annuity they need, which may previously have been left to employers or pension trustees – choosing between a fixed or inflation-linked income or whether to take a ‘joint life’ annuity which secures benefits for a surviving spouse.

3.18 People also face the challenge of navigating a sometimes opaque market to find the best value annuity rate for them. As the market currently stands, too many retirement providers are happy to take customers’ money but do little to actually make sure this money buys the best possible pension income when their customer comes to retire.

3.19 Without the right support from the retirement industry, too many customers will continue to miss the chance to make the best retirement choices – they may be too loyal to their current pension provider to realise they might get a better annuity deal with another firm, they aren’t aware of the positive impact a medically-underwritten annuity could have on their income, and they aren’t shopping around or getting the right level of information and advice they need.

3.20 Aviva however believes there are a number of measures that can be taken to improve people’s retirement finances. The annuity market was worth £10.8 billion in 2009 (source: ABI) and will expand rapidly as more people retire, and a greater proportion retire with a defined contribution pension. It is therefore vital we reform the annuity market now so it offers the best possible value to people entering retirement in the future.

3.21 The proposals contained in this report would be cost neutral to the Government, but improve immeasurably the standard of living and cash flow of people going into retirement. 3.16 This generation does however have property wealth on

its side, and for many deriving an income from bricks and mortar is a key part of their retirement planning. For these people, downsizing, equity release, renting a room or buy-to-let form part of their retirement plans.


4.1 Most people do not know what an annuity is or how to get the best one for their circumstances. This ignorance is costing them literally thousands of pounds during their lifetime in lost income. Last year 426,392 new annuities were taken out by 385,000 people, of which 57,982 were impaired life annuities. But, according to the Association of British Insurers (ABI), two thirds bought the annuity on offer from their pension providers rather than move to a better value product – and in many cases these customers are unlikely to have researched the market to find the best annuity for them before they made a choice.

4.2 The mechanism to help customers access the best annuity is already in place via the Open Market Option - but it clearly is not working as well as it could. Aviva wants the current system to be modernised to make it easier for customers to get the best deal they can for their retirement.

4.3 The main objective for a reformed open market should be to ensure customers feel confident, supported and engaged throughout the whole process - from deciding the level of advice they need, understanding what kind of annuity is most appropriate for them and looking around for the best rate.

4.6 To this end, we believe a series of structural improvements to the Open Market Option process would deliver much better outcomes for the UK’s retirees – so that those customers who can get a more appropriate product by shopping around can do so easily, without facing undue barriers to staying with the provider they saved with if they choose to.

Proposal 1: Requiring all annuity providers to publish annuity rates to make it easier for customers to make comparisons.4.7 UK annuity providers are not currently required to publish the annuity rates they offer to their customers when they reach pension age. Many companies already do so – especially those that are actively marketing their annuity products to new customers – but there is still a secretive significant minority allowing no comparisons.

4.8 Aviva wants the publication of annuity rates to be made compulsory - no matter whether the provider is offering annuities to the whole, ‘open’ market, or takes a ‘closed’ approach by only serving the customers that have saved for a pension with them.. This should be done is such a way as to allow a fair comparison between rates while protecting commercially sensitive information.

4.9 Examples of the rates a customer could expect to receive should be published via independent comparison tables compiled by a regulator such as the Financial Services Authority (FSA) – soon to become the Financial Conduct Authority (FCA) or the Money Advice Service. To keep costs to a minimum the tables could be displayed on their websites.

4.10 However the industry will need to work closely with both organisations to help develop this and to ensure a protocol is developed to allow various types of annuities to be displayed. Further, we believe the government and industry should work together to develop simple ways to effectively highlight to consumers the better rates they may be able to get by switching providers.

Aviva wants the publication of annuity rates – for both the open and closed markets – to be made compulsory.

4.5 Maintaining these relationships, and improving the information and tools available to consumers, should support them through a smooth journey to make a confident choice about their retirement finances.


Aviva’s proposals

The Open Market Option


4.11 Customers receive staggered information from their pension provider in the run up to retirement, and the second phase information packs always contains personal quotes for the customer. We propose providers should verify these quotes against currently available market rates – potentially making use of industry portals. These packs should make the customer aware that they could get a better retirement income by shopping around and indicate the possible increase.

4.12 Further, to help retirees understand the implications of not receiving a market competitive retirement income, Aviva proposes that these packs highlight to soon-to-be retirees examples of the best market rates, when the annuity the customer is being offered by their pension company is 10% less than the best rates available in the market for the same type of product.

Proposal 2: Including medical questionnaires in maturity packs to drive access to automatic underwriting in annuities.4.13 One of the most noticeable changes in the retirement market over the past few years has been the rise in number of enhanced or impaired life annuities. These are annuities which use medical underwriting to provide a higher than average income to people with conditions or lifestyles that are likely to reduce their life expectancy – such as obesity, asthma or diabetes. However, the Association of British Insurer’s Annuity Purchasing Behaviour paper reveals that, while 51% of those surveyed had heard of an enhanced annuity, they only accounted for 10% of all purchases.

4.14 Whilst the rising number of enhanced and impaired life annuity sales is intrinsically a good thing, these policies have typically been sold to customers receiving advice – 93% according to the ABI report. This means there is a significant proportion of the market which does not have automatic access to enhanced annuities – regardless of whether they turn out to be eligible or not.

4.15 Aviva proposes that basic medical questions are included in all customers’ pension maturity packs to ensure those who qualify for an enhanced or impaired annuity are more easily identified by the industry so firms can automatically offer them a tailored annuity. Furthermore, we believe this information should be used to generate underwritten annuity illustrations within the second phase of information the customer receives closer to retirement.

4.16 This simple step would radically transform retirement income for many customers in the UK market, as each would receive a fully underwritten annuity matching their circumstances. Where a customer has a health condition, they would automatically receive an annuity rate which factors this in and provides access to ‘enhanced rates’ (where appropriate) across the market.

4.18 Based on our experience of including these medical questions as standard, Aviva believes there is also an important consumer education issue around annuity medical questions. Customers can mistakenly believe that declaring medical information will have an adverse effect on their retirement income - making some people reticent in sharing this information. One in ten consumers Aviva surveyed said they would withhold medical information on an annuity application form for fear that it would affect their pension income, and over a fifth their income may decrease as a result of any medical conditions.

4.19 An industry-wide initiative to help customers’ understanding is needed, to play a key role in increasing the take up of enhanced and impaired life annuities. It needs to be explained clearly that providing adverse medical information will only ever improve the income on offer, never reduce it.

while 51% of people had heard of an enhanced annuity, they only accounted for 10% of all purchases


6 ICM Research for Aviva, April 2011

4.17 If a provider chooses not to offer an annuity with medical or lifestyle underwriting to a customer with a medical or lifestyle condition, we believe the provider should be compelled to tell the customer they could potentially receive a significantly better annuity rate in the Open Market.


4.20 Over the past 20 years there has been a dramatic change in the demographics of the retirement market place, which the industry as a whole has been slow to respond to. The two key changes are that today’s retirees are living longer than ever before and the way they have built up their pension savings is different to previous generations.

4.21 A sea-change is needed in the way consumers view their impending retirement and how it is financed. They need to be encouraged to move and amalgamate their smaller pension pots and to research both the annuity market and the type of advice they receive, be it from their employer, a financial adviser or an insurance company. Only then will they be in a position to make an informed choice about maximising their income in retirement.

Proposal 3: Reducing the costs of switching providers4.22 When the FSA’s Retail Distribution Review is implemented in 2012, the way customers access advice and guidance about their annuity is likely to split into two broad sections. Firstly, consumers may take full financial advice and the RDR will require the adviser to agree upfront with the customer a clear, standalone fee for advice.

4.23 Alternatively, customers may use a non-advised purchase route to choose their annuities. This service will not be subject to the same adviser charge transparency regulations and may continue to be charged on a commission basis. For many customers with relatively straightforward needs who have the confidence to act for themselves using guidance and information provided by the Money Advice Service, FSA and providers, a non advised sale is entirely appropriate.

4.24 We believe customers need to be clear on what the right advice or guidance model is for them, based both on what they can afford and what level of service they want and are willing to pay for. However, currently we are concerned that in some cases, the transparency being introduced into the advised market will not be mirrored in the operation of non advised sales. For non-advised sales, the cost can be too high and not immediately obvious. So theoretically, those customers who may opt for a seemingly lower priced service may actually end up paying more than had they had the benefit of full advice.

4.25 This is clearly not fair to consumers and we believe safeguards should be put in place to ensure each customer bears an appropriate, fair and transparent cost for the level of advice they receive. Part of the solution will be to drive healthy competition between annuity distributors, as much as between annuity providers.

4.26 Non-advised annuity sales should therefore be subject to the same cost transparency rules as advised sales. Ensuring charges are transparent and allow customers to understand the level of service they are buying will help empower consumers in shopping around and thereby drive down the cost of switching.

Proposal 4: Streamlining customers’ retirement savings4.27 As switching jobs every few years is now the norm for most, people are increasingly contributing to several private pension schemes during their working lives. Aviva research suggests that one in three workers (30%) have five jobs throughout their lifetime.

4.28 However, a worrying number of people are failing to keep details of their different pension pots, which could ultimately affect their private pension income in retirement. And nearly two thirds (60%) are unaware they can combine their private pension pots at retirement, potentially increasing their retirement income.


As switching jobs every few years is now the norm for most, people are increasingly contributing to several private pension schemes during their working lives.

Aviva’s proposals

Creating an annuity market fit for the future


Aviva believes it should be as easy as possible for people who have had a number of jobs to keep track of their pensions and to combine them into one easy to manage pot.


4.29 Aviva believes it should be as easy as possible for people who have had a number of jobs to keep track of their pensions and to combine them into one easy to manage pot. As well as struggling to stay on top of a number of small funds, savers who have built up several smaller private pensions across their working life are often quoted worse annuity rates by their existing pension providers, than they could receive from one combined pot.

4.30 While the introduction of auto-enrolment in 2012 will help get millions more people saving, it’s also likely to make it even harder for people to keep track of their funds – especially if they switch jobs regularly and build up a few small pension pots after being auto-enrolled into a variety of qualifying schemes.

4.31 We therefore believe legislation should be introduced to allow the automatic transfers of small auto-enrolled pension pots, so savings pots follow members when they move jobs. For this to be a success, the pensions industry should work together to develop a form of central clearing house to manage the transfer. This could make transfers easier by each pension it processes to the customer’s National Insurance number. We also believe the restriction on transfers into and from NEST should be removed to facilitate this.


4.32 People who can access the level of information, support and guidance they need when they come to choose an annuity will be far more likely to choose the type and level of annuity that suits them. But in many cases customers are not encouraged to seek an alternative journey to the ‘default’ they are offered by the firm they have been saving for a pension with.

Proposal 5: Helping customers choose an appropriate level of guidance and advice4.33 Aviva believes it should be as simple as possible for every customer to choose the level of support they need when making financial decisions about their retirement. Customers who feel confident and knowledgeable, and who may have relatively simple retirement finances, may well be entirely happy purchasing an annuity direct from a provider, over the phone or the internet, in a non-advised setting. On the other hand, there may be many vulnerable customers who are disconnected from the financial services industry, and need easy access to appropriate sources of advice and information. In short, consumers should have confidence in the level of support they receive, no matter which route they use to manage their retirement finances.

4.34 Aviva believes non-advised services may become more attractive when the rules to remove commission from products bought through full advice from an independent financial adviser come into effect under the Retail Distribution Review in 2012. It is good news that the costs of advice will become more transparent, however, these measures may limit the numbers of people unable or unwilling to seek advice.


Aviva’s proposals

Addressing customer needs

The fi nancial services market would fail its customers if they are limited to either making their own choice with limited support, or having to pay upfront for a full advice session



4.35 The financial services market would fail its customers if they are limited to either making their own choice with limited support, or having to pay upfront for a full advice session (particularly customers with smaller levels of savings or income who may find the costs of advice a deterrent.) Without some form of personalised support, some customers may feel cut off and unable to make the right choice for them.

4.36 A middle ground is therefore required, and following the Retail Distribution Review, the proposed introduction of ‘simplified advice’ could be a great solution for many customers who, with the right amount of guidance, would feel comfortable choosing the type of annuity and provider that is right for them. However, for these services to develop, the industry needs much greater regulatory clarity. Challenges around the level of qualification the people helping customers need to have remain - and we are asking that the ‘simplified process’ itself is regulated, rather than the person delivering it.

4.37 We’ve seen that people are retiring with a greater number of pension pots, a combination of final salary and defined contribution pensions, and drawing on a range of assets such as investments, and housing, and continuing to work to earn some income during retirement. To make the most efficient and effective use of this range of assets, some customers may wish to access advice that addresses each area of a customer’s finances and talk to providers and advisers that either advise on the full range of needs themselves or refer to a specialist where they aren’t qualified. We suggest a new form of adviser ‘badge’ is created and promoted to customers so they know that if they talk to a ‘retirement adviser’ they will be able to create a plan that addresses all their financial needs.

We suggest a new form of adviser ‘badge’ is created and promoted to customers so they know that if they talk to a ‘retirement adviser’ they will be able to create a plan that addresses all their fi nancial needs


Conclusion


5.1 The current retirement industry, while not broken, is no longer serving customers as well as it could. It was conceived in a different era, when people’s pensions were much simpler and their life expectancy lower.

5.2 Wide sweeping social and economic factors are changing the retirement landscape in the UK, with both working and saving patterns changing dramatically.

5.3 Responding to these trends, the Government is introducing radical changes to the state pension system and retirement rules, such as the introduction of automatic pension enrolment and NEST, removing the requirement for everybody to buy an annuity before they are 75, and publishing proposals to move to a simpler flat rate pension.

5.4 The retirement industry must play its part in rethinking its retirement offerings and adapting them to the social and economic changes ahead. Our customers face a very different retirement to their predecessors and we must takes practical steps to support them in this new landscape, to help our customers achieve the prosperity and peace of mind that they have saved all their lives for.

5.5 We must make sure we are offering the best retirement options for customers, and this means providing timely and easily understandable advice and information. This should help ensure that searching the market for the best annuity deal to suit their personal circumstances will become second nature to a new generation of confident, astute consumers, just as it has with the purchase of car and home insurance. Customers need access to retirement advice that not only matches their financial needs, but which also encompasses their lifestyle and longer term needs.

5.6 To make these aspirations a reality, Aviva believes the industry must support the reform agenda the Government is progressing, by implementing the changes we have outlined to make retirement and annuities work for customers once more.


Glossary


What is an annuity?6.1 An annuity is a retirement income plan, which is designed to provide an income for the rest of your life, no matter how long you live. You buy an annuity using a lump sum from your pension or, perhaps, some savings

Annuities are only available from insurance companies.

What is the Open Market Option?6.2 An individual can choose who to buy their annuity from - it doesn’t have to be with the insurance company that they used to build up their pension fund. The amount of income an individual could receive from an annuity will vary between different insurance companies, so it’s a good idea to do some comparisons before making a decision.

What is “Tax free cash”?6.3 An individual can normally choose to take up to 25% of their pension fund as a tax-free cash lump sum. This may be paid either by the pension provider or by the annuity provider, depending on an annuity is purchased.

What is a pension?6.4 A personal pension is a long-term investment that aims to help an individual build up a pot of money that they can use to buy an income when they retire.

It’s a tax efficient way to invest for retirement because HM Revenue & Customs (HMRC) adds tax relief to the payments made into a plan.

What is a defined benefit pension scheme?6.5 A defined benefit pension scheme is one that offers a retirement income which is directly based on your final salary when you retire or leave the company, and your length of service.

What is a defined contribution pension scheme?6.6 With a Defined Contribution pension scheme (also known as money purchase), the benefits are not known until they are taken. Contributions are paid to the scheme and invested in the chosen investment funds and the value of the fund when the member takes their benefits will be used to provide their pension benefits, usually by buying an annuity.

What is automatic enrolment?6.7 In October 2012, new employer duties are planned to come into force, which will require employers to enrol eligible workers into a qualifying workplace pension arrangement. While individuals will have the right to opt out, those remaining in the scheme will have to make contributions which will gradually be phased up to 4% of their qualifying earnings. Employers will be required to contribute 3%, and the government will add another 1% in tax relief.


Aviva also produces a series of reports looking at Retirement and Prosperity in the UK and across Europe.

The Real retirement reportQuarterly insight into the attitudes of UK retirees and pre retirees

Mind the GapRegular insight into retirement funding across Europe

Family Finances ReportDeveloping a picture of UK family types and their approach to finances

Future Prosperity PanelWorking with the Economic Intelligence Unit and leaning thinkers to better understand the financial issues affecting customers

These reports are available on www.aviva.com/media



30854 05/2011 © Aviva plc

Aviva Life Services UK Limited. Registered in England No 2403746. 2 Rougier Street, York, YO90 1UU.

Aviva Life Services UK Limited is authorised and regulated by the Financial Services Authority.

www.aviva.co.uk


Documents

Rethinking retirement in the UK - Aviva › content › dam › aviva-corporate › ...Aviva Real Retirement Report 7 2.5 Rethinking Retirement in the UK sets out a number of key changes