An excellent analysis of the problems people face turning pension pots into a wage for the rest of their lives.

1. September 2022
How can we ensure DC savers
achieve good outcomes post
retirement?

3. What happens post-retirement –
the missing link?
1
Initial focus of policy on
‘accumulation’
• Automatic enrolment to
get 10m people saving
into a pension
Very little policy thought
about post retirement?
• Schemes starting to
innovate
• Are annuities really dead?
Major policy shift on what
happens ‘at retirement’
• Introduction of ‘pension
freedoms’ in 2015
• Annuity sales slump, most
people cash out small pots
• FCA ‘investment pathways’
for those not cashing out in
full

4. 2021 Research results
2
• £1m pot and ignored the impact of state pension
• Allowed for low yields in early 2021
• Used Annuity Purchase as the “default option” and assessed
relative happiness of adopting drawdown instead
• +50/-200/+10 utility factors

5. Uncertainty of life expectancy is the issue

6. Refinements to our model
3
• Incorporates state pension, assumed payable in full at 67
• Smaller pot size – now £150k pot (which is average size used
for first drawdown withdrawal according to FCA)
• Objectives now defined in terms of setting a target income:
• 67% of pre-retirement gross income
• 50% of pre-retirement gross income
• Income taken to be median UK salary (around £26k)
• Extended age range to allow for later annuity purchase
• Utility factors changed to +80/-200/+10

7. Pure drawdown strategy
4a

8. Pure annuity strategy
4b

9. But why not the ‘best of both worlds’
-the ‘flex first, fix later’ pension?
Has an opt out,
especially if
circumstances change
Starts wholly or largely in
drawdown, invested for
growth
Is designed from the
start to switch in whole or
part to an annuity at a
later age
5

10. So what is the ‘right’ age? – 67% target
6a

11. So what is the ‘right’ age? – 50% target
6b

12. Ifbuying anannuity isthe‘rightanswer’,
whatarethebarriers?
Multiple barriers
to switching to
an annuity:
ECONOMICS OF ADVICE / GUIDANCE FOR MODEST DC POTS?
4
1 INERTIA
2 COGNITIVE DECLINE
3 ENSURING VFM – WOULD PEOPLE SHOP AROUND?
7

13. How does this tackle the ‘four
barriers’ to annuitisation in later
retirement?
INERTIA?
1
Overcome because of
default switch to annuity
COGNITIVE
DECLINE?
2
Product bought *at
retirement* rather than when
much older
Could reduce ‘scam’ risk if
older savers are no longer
managing investments?
ENSURING VFM
3
Product could be structured
either
• to be part of bulk annuity
purchase by provider or
• could facilitate
individually underwritten
annuity
ADVICE/
GUIDANCE?
4
Could be given primarily ‘at
retirement’
8

14. Issues to consider in designing the
product
COMMUNICATIONS
Need repeated reminder of switch to
annuity, especially just before it happens
FLEXIBILITY
Needs to flex in event of major change in
circumstances
SIMPLICITY
Whilst modelling suggested everyone
has a unique ‘optimal’ age to switch, is a
standard age easier to communicate?
DESIGN OF ANNUITY
• Single/joint life? Index-linked?
• Role of *guarantees*
• Potential for ‘bulk’ annuity purchase
by product provider
9

15. Other factors to consider in the future
• Intelligent drawdown strategies
• Dynamic investment strategies
• Timing of annuity purchase (based on market conditions?)
• More complex utility curve shapes
• Impact of deferred/partial annuitisation options
• But I would expect to life expectancy uncertainty to always win in
the end with an annuity purchase to become the best option in
old age