Chancellor George Osborne’s plans to shake up the personal pensions market from next April have created quite a stir in the investment world.
The damage done to the share prices of annuity providers suggests that markets believe that most people will no longer swap their pension pots for an income for life when they retire, and will look to take charge of their own money instead.
However, it might not be as cut and dried as all that. These changes are a good thing – they should make the retirement planning process more transparent and, hopefully, cheaper. But creating a DIY annuity – generating a high level of income from your savings, with some protection from inflation, that lasts as long as you live – is no easy task.
So there’s going to be a market there for anyone who can, in effect, build a better annuity for the post-Osborne era.
Last week, giant US asset manager Blackrock said that it plans to do just that. It reckons around £15bn of savings a year in the UK that would have gone into annuities will now be looking for a new home. But what might these products look like?
Blackrock has lots of experience providing retirement investment products in America. Since 1993, it has sold ‘LifePath’ funds to its customers. These are ‘target date’ funds, based on when the customer wants to retire. So someone could buy a 2025 fund or a 2055 one, for example. The funds invest in a mixture of shares, bonds and money market funds (cash, basically).
As retirement nears, the mix becomes more cautious with more money shifted into bonds. This ‘life cycle investing’ is used in many UK pension plans already.
Of more interest is how these LifePath funds provide a retirement income. Blackrock has looked at ways of getting around the problems of inflation protection and running out of money.
A big part of the answer comes from annuities – but instead of buying the annuity on the retirement day, the investor gradually accumulates annuity income over time, so as not to get locked in to one fixed rate.
This goes on until they have the optimum level of annuitised income. The rest of their savings are then invested in assets offering inflation protection, such as index-linked bonds or shares.
The strategy looks similar to the flexible draw down plans (which currently require a minimum guaranteed income) that some UK pensioners have right now, and it avoids the risk of running out of money. Talk of the death of the annuity may thus be premature – they might just be used in a smarter way.