Simon Chinnery: how to survive retirement in a world of ‘pensions freedom’

Merryn Somerset Webb talks to JP Morgan Asset Management’s Simon Chinnery about the changes in the world of pensions investments, and how the financial industry and consumers must respond.

• If you missed any of Merryn’s past interviews, you can see them all here.

Merryn: I’m Merryn Somerset Webb, editor-in-chief of MoneyWeek, and I’m here today with Simon Chinnery of JP Morgan Asset Management, and we’re going to be talk about one of our favourite topics, if not everybody’s favourite topic: pensions.

Now Simon, there’s been an awful lot of change in the pensions environment recently. What do you think have been the changes that have been the most relevant to our readers, and also maybe the most exciting?

Simon: Well, I think a couple of things. One would be auto-enrolment which is well underway now, and the other one would be, I think, the changes we saw from the Budget last year: freedom and choice. And what we’ve seen – early stages at the moment – but what we’ve seen so far is a lot fewer people buying annuities or wanting to buy annuities. So people thinking about what they do want to do with their money, how they want to spend it. That’s brought up a lot of debate around the retirement arena which perhaps before nobody really bothered about, because everyone went off and bought an annuity.

Merryn: Yes, but interesting that even before these changes in the Budget, you didn’t have to buy an annuity, did you? You could go into drawdown – not flexible drawdown, capped drawdown – if you didn’t have a huge amount of money. So even in the past, there was the option for people to go non-annuity but really, people just didn’t.

Simon: Well, I guess a lot of people didn’t because they didn’t have enough money. I suspect that the rarefied air of people who went and bought drawdown is now an expanded universe, so lots more people can think about what they might want to do with their money.

At the moment, drawdown, well, how much money do you need for drawdown? Well, I guess the comparator would be to say at the moment, if I put £100,000 into an annuity, what’s that going to give me on an annual, maybe, I don’t know, £5,000? That doesn’t feel like a very good deal. So I think people are saying, “Well, actually, if I’ve got £100,000, how might I be able to improve on that?”

Merryn: £5,000 doesn’t sound bad. That’s 5%. That seems reasonably high, given the interest-rate environment. I mean, you’d be hard pushed to make 5% yourself for £100,000, safely.

Simon: Yes, but I think the other thing that is beginning to surface is people thinking about not only what they’re going to do in retirement, but how long they might be in retirement. As I’m sure you know, people may well be living, I don’t know, mid-80s and beyond and therefore that’s a long time not earning.

I think the other thing that’s of interest now is that people in the old defined-benefit world got to retirement and then went off and played golf or whatever they did. Now, of course, people are thinking about maybe they want to work a bit longer, they want to go part-time. They want to keep busy in different ways, paid or unpaid.

I think now that whole world is a lot more fluid and therefore people may want to spend money in different ways. I mean, one of the big challenges is that what is happening now is probably not that representative of the future because I think at the moment people are mainly retiring with defined benefit guarantees in place, to a greater or lesser…

Merryn: Mainly? Do you really think so?

Advisers are still very much focused on the directors and executives end of the market. But soon there will be a mass market of people with £50,000-£100,000 saved

Simon: …to a greater or lesser extent. I think they’ll have some kind of underpin. It may not be a great amount but it’ll have to pay the bills.

Merryn: That maybe they’ll have a pension from their first job in their 20s or 30s or maybe their 40s, which is giving them a low level of defined benefit, and putting their DC [‘defined contributions’ pension] on top of that?

Simon: Yes, and maybe these are people who’ve also saved in Isas for a number of years. They may have moved into two or three job changes which have had DC pots, so they may kind of view the DC pots as money that they can access easily.

I suppose the interest from our side is to look at how that may change quite quickly, because once that DB [‘defined benefits’ pension] guarantee wedge has sort of died out, and maybe that happens in ten years or so –

Merryn: Ten seems very soon, doesn’t it? I mean, I obviously – not obviously – but I don’t have a DB pension and most people my age don’t have a DB pension, but I have a lot of friends who are maybe only four, five years older than me, who do, which I find exceptionally irritating. It suggests that the gap isn’t that far. It’ll be ten years and the DB pension thing will be pretty much gone.

Simon: Absolutely, and then the question would be, have those people saved sufficiently? Particularly if they’re actually thinking about what they’re going to be doing which, who knows what they’ll be doing when they want to retire, but it’s likely they’re going to be working for longer.

I think the savings challenge now is not so much about the people and what they’re doing now, whether they’re taking cash, how they’re spending it, but actually what people might want in terms of saving vehicles and what they might want to do in retirement.

Merryn: Yes. Well, there’s really two challenges here, aren’t there? Your industry is the fund management industry and wealth management. Very geared to accumulation. The idea being that you help people get the money together. Give them vehicles into which they can save, and the point of the industry up until now has been to help people save the maximum possible until their retirement date. To shift their assets around the place so they move into lower-risk products, or lower-risk asset classes as they hit their retirement date. Then post-retirement date, it’s not your problem anymore because they’ve gone off and bought an annuity.

Simon: Correct.

Merryn: So now we still have this accumulation problem, although it’s a slightly different problem from what it used to be. Then, for an industry, you have a whole new area which should be very exciting for you, which is helping people through the de-accumulation stage; helping them run their money down over their retirement, so that it lasts but also provides them with the lifestyle that they want during that de-accumulation period. That’s sort of an entirely new business for the financial services industry in the UK.

Simon: It is a new business, yes. It’s a good point because personally I thought that the adviser market would respond perhaps quicker, with more enthusiasm, about this new mass market, mass affluent, whatever you want to call it, but my sense is that they’re still very much focused on the large sort of directors and executives end of the SIPP market: the self-investment and personal pension area where £200,000, £300,000 is the kind of engagement point for them.

I think that over time what we’re going to see, especially if DC pots are consolidated, is that over a relatively short period of time, there will be a mass market of people who’ve got, I don’t know, £50,000, £60,000, £100,000 saved and they don’t want to buy an annuity, and they probably are not going to get advice. They don’t want advice, and so what are those people going to do?

I think that’s kind of the challenge for us in the industry, to imagine something which is good enough and simple enough and transparent enough to be able to be used, probably as an alternative to a bank account.

Merryn: Exactly. Well, let’s take this in two stages, really. Let’s look at the accumulation stage first because the way that one saves for retirement now changes slightly, because if you’re not building up to it – in the past people who’ve been saving for a time and moving up to one thing, one date when they want to have the maximum cash possible, or the maximum low-risk asset possible so that they can then buy the best annuity they possibly can, and this is over time. This has involved people having equities or similar. High risk, or assets that we consider to be high risk, at the beginning of their saving career, moving into the bond market towards the end of their savings career because that’s what the industry considers to be low risk. I think they’re wrong, by the way, but that’s another argument.

The challenge for us in the industry, is to imagine something which is good enough and simple enough and transparent enough to be able to be used as an alternative to a bank account

Simon: I’d agree with that.

Merryn: This is known and has always been known as “lifestyling” so you can, equity into bond and then on the day of your retirement, you’ve got a portfolio that is basically all bonds and cash.

Simon: You buy an annuity.

Merryn: You buy an annuity – kaboom, it’s done. Now, we don’t have that any more. No one’s building up for this one date that… you know, they’re going to draw this money down or need this money on any large number of dates, from age 55 on. That means the mix of assets that you save in, in the run up to your retirement, whenever that may be, is very different.

Simon: Yes. I think we’ve come the way we have in terms of lifestyle, lifecycle, and I think that was very much a set and forget. I think it was pretty simplistic in the sense that it was just as you say, put them in equities when they’re younger. They’ll get good growth from that over time. The assumption was of course you’re going to get returns of maybe between 8% and 10% per annum. Then possibly in the last five, seven years or so, you glide them or change them down.

Merryn: Glide them, yes, this is a great phrase. “The glide path”, people always talk about in your business, like gliding you from high risk to low risk.

Simon: Gliding as if it’s like a swan, yes.

Merryn: As though it were easy.

Simon: Well, and actually it is a good analogy because in fact it’s nothing like a swan gliding on the surface of the water. Particularly lifecycle, it’s a whole load of mechanistic, administrative changes in a very clunky fashion which has nothing to do with markets, which literally took you out of these riskier assets into less risky assets in a fairly fast and furious manner, after maybe five, seven years.

Merryn: Can we just clarify here and say that we’re using risky and less risky in the sort of traditional, the financial sense of risky and not risky, which has been…

Simon: Yes. I mean, yes, so the simplistic of the “equities, bonds, cash – boom, there, you’re done”, absolutely is not a model that’s sustainable. I think lifecycle is absolutely broken in that.

I think what really you need is something that is going to be wll diversified. It manages the money and manages the various risks that go through the different ages that an individual has in terms of events, in terms of what happens in their life, and actually then eventually goes to a point where they can take the money. Even then, I think it’s really critical that they’re not stuck in something. I mean, you said bonds are old-fashioned, less risky. I think now they’re certainly very risky and why would you want to park somebody in that, especially if they may not buy an annuity? So I think a multi-asset fund…

Merryn: If we’re talking about a 30, 40 year retirement, you still want to be in something that has risk in the traditional sense –

Simon: You need some growth assets.

Merryn: ie it’s going to have a chance of giving you some growth at the same time as income.

Simon: Yes. Our industry is brilliant at over-engineering everything. Right now, I think the biggest problem that we’re seeing is that advisers are looking at these old-fashioned glide paths and lifecycle structures and saying, “I know”, exactly what you said, “Because people need a bit more growth, what we’ll do is we’ll put a diversified growth fund in there”. That’s a multi-asset fund, “And we’ll keep them all in risk assets for longer”.

Even beyond that, what some of them are doing is slicing and dicing the workforce and saying, “Well, anybody who owns under £30,000, they’ll probably take cash. So we’ll glide them into cash”. Then there’s another lot, however they define that other lot, as likely to buy an annuity. That’s a different thing, so we’ll have a different glide path for them.

Suddenly you have this bizarre thing where you’ve got multiple defaults, which is fine if you ask people, “What do you want to do?” but most people have no idea what they want to do.

Merryn: That’s why there’s no point in asking someone who’s 30 what they might want when they’re 55. There’s no point asking someone who’s 45 what they want when they’re 55 these days.

Simon: I agree, and I think that most people, let’s remember that most people are in a default in UK DC: 80%, 90% of members. They have probably said, “I want somebody else to do…”.

Merryn: Just to clarify, when you say, “default”, what you mean is that when people sign up for a pension with their company or whatever, there is a fund that will be the one they will go into unless they actively choose something else and that’s known as the default fund.

If people decide they want to work longer, they could be parked in cash for five, six, seven years. Not a great place to be at the moment

Simon: Thank you, yes, and so this default, and this is where lifecycle comes in and this sort of fairly simplistic design of the past, is you’re in that fund and you’re going to go and buy an annuity.

Well, suddenly these people have not, but to actually ask them what they want to do is not going to get the right result, mostly. To actually then allocate people to these different glide paths on some basis of assumptions, “Well, they’re all likely to take cash”, I think is very risky because if people decide they want to work longer, you could be parked in cash for five, six, seven years. Not a great place to be at the moment.

Merryn: Do you think that there’s a risk here that these default funds become another miss-selling scandal, in that you can say that a default is not advised, but if you’re creating a default based on a set of assumptions, you are effectively saying to the person, “We advise you to take this one because we’ve created it as your default’?

Simon: I think there’s multiple glide paths, there’s multiple defaults, if somebody has decided for you that you are likely to buy an annuity and what happens? We don’t know the whole picture, we don’t know that individual. How many other places they’ve got money, whether they’ve got a partner that has actually greater earnings. We don’t know the whole picture. So we would go, “Why are you getting involved in all this over-engineering?” With the possibility that ten, 15 years down the line somebody goes, “Well hold on, I was put in this fund and actually I ended up getting nothing, or very little, for many years”. You know, it’s likely that, I imagine that they would want to blame somebody.

Just parking that a moment, it seems to me that if you have a multi-asset fund, that is actively managed between these different asset classes and managing these different risks, whether it’s inflation or interest rate risk, or the fact that you’re going to insist on living longer, well, why wouldn’t you have something which if you want the money as cash, you just cash in the units? It’s liquid. It’s not rocket science.

If you want an annuity, well, towards the end of the glide path, it is likely you’re going to have a higher allocation to bonds, but they don’t all have to be gilts. They can be longer dated. They can be government, corporate bonds. Bit of high yield in there. Emerging market debt where appropriate. So you’re well diversified.

The point being that that actually is more of a proxy for buying annuities now, than simply the old days of buying over 50 new gilts, and if you wanted something that well, actually, I want an income drawdown, well, you’re in a multi-asset vehicle that has growth in it. Our own fund ends up at about 25% in equities now and another 5% in real assets.

Merryn: So your answer to absolutely everything is multi-asset funding?

For people who don’t know what they want to do, what is really important is to manage a multi-asset fund, not just for the sake of it, but with an objective of a target income replacement

Simon: Yes. Actually, it’s about saying, for these people that don’t know what they want to do, then what we feel is really important is to manage a multi-asset fund, not just for the sake of it but actually with an objective of a target income replacement; a minimum income replacement, because if you don’t, to your point earlier about saying, “People just want to maximise growth”, that’s great but unfortunately, it will depend on your timing as to when you got into whatever fund it is, and you might be in one equity fund, I’m in another. They have very different returns, and we’re down the pub and one of us is feeling great because we’ve got a good return but the other’s actually feeling a bit deflated.

Our point is, why wouldn’t we manage everybody on the basis of actually trying to get them to a minimum income replacement? On the basis then actually that should help the company because the company doesn’t want to be looking after these people forever either. They’d like to encourage these people to move on into retirement.

Merryn: Move on into what?

Simon: Well, yes, and then of course we’re delighted to offer things other than multi-asset. Although multi-asset, funnily enough, does feature strongly in terms of income. You know, diversification actively managed, if people need income, if they need exposure, if they just want something that gives them a good profile…

Merryn: This is an interesting point. You talk about needing income. I’m confused, always by something, but particularly confused by the idea that in retirement, people talk about needing income and they don’t think of capital as income. Whereas it rather seems to me that once you’re into your de-accumulating phase, into your drawdown phase, it doesn’t make any difference whether what you take out is technically income or technically capital.

You know, I had a telephone call from an elderly friend a few years ago who said to me that she was worried she didn’t have enough money, and I said, “Well, how’s that working out?” and she said it was because the income from her fund was so low and her adviser strongly advised against her taking any of the capital. Now, she was 87. Do you know what? Spend the capital. It doesn’t make any difference. It’s all money, but the industry is still making this distinction for people for whom it really shouldn’t matter, between income and capital.

Simon: I think it is a great British fixation with at all costs preserve the capital, and we’d agree because I think it’s about the utility of that money, isn’t it? It’s about saying, on the one hand how long are you going to live, and you hopefully want to live as long as you can, and on the other, how much money can you spend in a way that gives you the most options in retirement? In a way that actually gives you a greater degree of return overall, and I agree with you.

I mean, if you need to, if you want to allocate some money, either as an insurance policy to, I don’t know, buy an annuity at a later date, go ahead. Or if you have enough money to actually be able to preserve that for the future generations, great. But actually if you just want to live off your money – after all, you’ve done a lot to build it up – why wouldn’t you then just draw it?

I guess the key that we’re looking at is how do you create a sustainable level of pay out? No guarantees because you need to go and buy an annuity, but something that gives you a good enough return, and so it’s not just income, it could be capital. It would be capital as well.

Merryn: So we should always look at things in terms of total returns in the de-accumulatory phase, surely?

Simon: I just think the difference of your quality of life, certainly in the first, say 10, 15 years of retirement, when supposedly you are probably more active, doing a lot of different things, that wouldn’t you want the difference of having an extra £2,000 or £3,000 that because you’re able to take money, that was capital as well as income, in something that did look to keep the growth going, in terms of the capital, so it didn’t just scoop money off for global income fund?

It feels to me that then you’ve got a much better potential quality of living. The trouble is that people feel that they become risk-averse, but there’s a lot of evidence to say that unfortunately what happens is people actually underspend.

Merryn: Well, this is the thing. People don’t spend enough money because they’re – what’s enough? They don’t spend as much as they could to live a happy life because they’re so terrified about running down the capital when they probably haven’t got that much life left, which always seems to me incredibly sad.

I think there’s a lot the industry could do around that, to an annuity. Obviously, you haven’t got any capital, so you’re not leaving any capital. There must be a middle way that the industry can create, that will allow people to feel OK about drawing down their capital, with some insurance that they won’t run out.

Simon: It could be, I think it’s also important to give people that flexibility that at any time you can take your money. If circumstances change, that’s fine. You can have access to your money, but I think this idea that just to say you have income and at all costs keep that money, that capital, I agree that I think it would lead to a paucity of living.

Merryn: On that very subject of people refusing to sell their capital, I wonder how you feel about the removal of the death tax on pensions so people can now effectively leave their pensions in their entirety, tax-free – inheritance-tax free and death-tax free etc, to their children, post-75, subject to the children or the heirs, paying their marginal rate of income tax? Nonetheless, this is an enormous and kind of bizarre incentive to the retired to not spend any money.

Simon: Yes, don’t spend the money, whatever you do, yes.

Merryn: Don’t spend your money because you can now leave it to your children IHT free. Of course this effectively creates, for well-off families, a family trust in perpetuity, and for the not so well-off, it creates a sort of desperation to not spend pension money. It seems to me to be a very distortionary policy.

Simon: I suspect though, again, we’re in quite rarefied air. I suspect most people will not have got sufficient savings, certainly in the next generation, to actually have that luxury of being able to say, “You know what? There’s a pension pot over there and I’m just not going to touch it”.

Merryn: So it’s just another bung for the rich?

If you just want to live off your money – after all, you’ve done a lot to build it up – why wouldn’t you then just draw it?

Simon: Well, your words not mine, but I mean, I think the interesting thing out of this change in the next decade or so will be the emergence of an influential, mass affluent market of people who actually are quite thoughtful about what they want to do. It doesn’t mean they want to do their own thing, which is probably a good thing, but actually are looking for solutions that give them access to their money, give them some comfort that that money is sustainable; that they’re not going to outlive it, but actually they can enjoy the quality of life.

I think that’s the area that if we don’t address that, I think our industry is quite rightly then going to be accused of just pandering or looking after the sort of tax breaks.

Merryn: Listen Simon, aren’t you scared of this? A whole new generation of people who are going to be relatively well-educated about their finances. Who are going to be desperate to make their money last for 30, 40, 50 years, and therefore totally on top of the business of the outrageous fees the industry charges them. Comparing their own retirement with your retirement, etc.

Isn’t your industry frightened and if it isn’t, shouldn’t it be bloody terrified, because once the middle classes of England rise up against something, they rise up, and if they rise up against the way they’ve been treated by the financial services industry, and in particular against the fees, the complicated structure and as you say, your industry’s propensity to over-engineer, the profit margins of the likes of JP Morgan Asset Management, ooh, they’re in some danger?

Simon: Well, I think that certainly in DC, we built our target date funds in an environment where the regulator was very much focused on the devolved plans within auto-enrolment. So we’d like to think they’re as transparent as possible. It’s very simple pricing.

I actually think that it looks likely that we should have some kind of price capping in retirement. Now, what that will look like in terms of default, and how simple those motions will be, you know, it’s not a bad discipline. If we are looking a market that’s going to be much bigger, then I think it’s appropriate that we have the right kind of regulation overseeing it. I think in terms of information, particularly if people, yes they’ll want to be informed but I suspect they’ll also just want to get on with being retired and having capital for the rest of their life.

Merryn: Think of all that spare time they’ll have. Think of how much spare time the retired have, and once they’ve started complaining about the charges on their pensions, the next thing they’re going to notice is the charges on their Isas. They’re going to notice how much they’re being charged for insurance, etc, etc.

You know, you never have time to sit down for the three, four hours a month you should and look after your finances before you’re retired, but after you’re retired, it’s not just coming in every month in annuity payments, but you’ve got to generate it yourself. There’s a huge focus then that I hope will massively improve the financial services industry in the UK, that pressure.

Simon: I absolutely think that we as an industry, and certainly JP Morgan Asset Management, what we want to do is make sure that we produce stuff, and that’s a technical term, that is actually going to be used and is transparent in terms of how it’s priced, what it’s going to deliver, what it’s not going to deliver.

We want people to be informed in terms of the choice because we definitely don’t want somebody saying, “Well, I’m not going to buy an annuity” but then buying something that they go, “Well, I thought it was guaranteed”. Either that’s really bad communication in terms of marketing, or it’s somehow been mis-sold.

I think if we are in a world where we want to see people actually not only build up sufficient assets to be able to retire, which is a big challenge, I think, in the future, but then when they are in retirement, that they have that flexibility and they can see at any time what their fund or funds are doing.

You know, maybe they’re not going to spend hours every day worrying about it. I mean, some might, but I think a lot of them want to be able to feel that they have still, kind of being in a default. It’s almost like a default in retirement.

Merryn: They don’t want to engage that much?

Simon: No, I suspect not. They’ll dip in and out and they’ll want to have a look, and that may be where technology comes to…

Merryn: So you’re not expecting all that pressure on your margins from a well-educated group of retirees?

Simon: We live with pressure all the time, so we’re under the spotlight and I think that’s appropriate. I think this is part of the next generation of defined contribution and retirement. I think a world in which we can actually see solutions that come up, that are kind of fed back from the market.

Something that we also hear, of course, is that people want everything. “Can I have a guarantee? Can I have super growth? Can I have all my money back plus… oh, and I’d like to pass it on to the next generation”.

Merryn: “And I’d like to be better at golf”.

Maybe we can’t deliver on everything, but we should try, and what we can’t do, we should be clear about

Simon: “And if you can promise me that, I’ll buy your fund”. Maybe we can’t deliver on all of those, but we should try, and what we can’t do, we should be clear about. I think it’s possible, I really do. I’m in this industry because I do think that we have a duty of care, as kind of trustees would feel, not just to people as they accumulate the money but actually how they spend it.

If those people coming out to a world where they either choose not to get advice, or they don’t want advice, but maybe they look to people like you and they’ll say, “Well, what kind of options are out there?” I think it’s really that they’ll just say, “I don’t want to be drowned in choices, but if there are two or three things I should think about, why wouldn’t I kind of have a look through and go, “OK, that one sounds appropriate”? As long as I can get my money at any time. Yes, I understand what I’m buying”. That, I don’t see why we put that in the ‘too hard’ box.

Merryn: You mentioned just now, and we haven’t really elaborated on it, target funds, and we were slightly talking about them earlier, but would you explain briefly what that actually means?

Simon: Sure. A target date fund is a single fund, managed dynamically, usually actively, through the whole journey of say, from the first point, where you go into a job, to the point where you retire. Over time, the glide path will move from riskier assets to less risky assets, but it’s actively managed.

Merryn: So just as a modern lifecycle fund?

Simon: Well, I would say there are very distinct differences. Lifecycle is a selection of individual funds, often made by a consultant or adviser, put into a mechanistic administrative machinery, which will just swap you out of these funds, often.

Merryn: OK, and this is just one fund that operates the whole way through?

Simon: This is one fund, multi-asset. Our own target date funds have something like ten different asset classes at any time. Something like 20 different strategies. There’s a lot of underlying movement, so the swan gliding and underneath may be quite a lot of paddling.

Merryn: All the time we were talking earlier about multi-asset funds, but you’re really talking about just target date funds?

Simon: Well, target date funds, because we just think it’s a natural evolution from where we’ve come from, which is the old balanced funds, you know, 60/40 equity/bonds, whatever it is. To something where professionally it’s being managed. Managing these different risks: inflation, interest rate risk, longevity risk, event, you know, what happens in the market.

It’s got to be actively managed and in our case, it is focused on an income replacement target, rather than just saying, “We’re going to shove as much money as we can into risky assets and let’s hope some of you have a great retirement”. I just think that’s not a good deal for members. It’s not about the top 10% who can afford, probably, to play with money more. It’s about every single member in the DC plan.

Merryn: Do you think that the annuity market will come back a bit from here? In fact the annuity market has been very difficult because of super-low interest rates. Also there has been a hefty degree of over-charging and bad advice and failing to take individuality in to account when selling them, etc., etc. Nonetheless, if you ask people what they want in retirement, very often they describe something that sounds just like an annuity.

Simon: Which sounds like an annuity until you tell them it’s an annuity, and then they go, “No, I don’t want one”.

Merryn: Exactly, so it may be that in ten years out, in fact 20% or 30% of the market returns to being annuities. Is that something you see happening?

Annuities are in no way dead. It’s just that right now, that word is toxic

Simon: Absolutely. I have no doubt that annuities are in no way dead. I think we’ll see a spate of different types of annuities. For instance Nest has talked about hoping that there’ll be an emergence of a market around deferred annuities. I think it’s quite normal that people say, “Well, actually, for the first ten or 15 years, maybe I’m still doing a bit of work. I’m keeping my options open. Why would I want to buy a guaranteed income?  But actually I can imagine when I get to 75, 80 or whatever, yes”.

Merryn: “I’d like it.”

Simon: “You know, because I don’t want to think about this so much now”. So absolutely, I think annuities are a great deal in the right time and the right place, for individuals. It’s just that right now, that word is toxic. It’s a bit like “with profits” used to be toxic, or probably still is.

Merryn: I don’t know. I kind of see with profits coming back as well, in this new market. That idea of smoothing returns over the long term, if it’s done in a non-corrupt way, would be rather wonderful.

Simon: Yes, and you know, the original concept around with profits was actually a perfectly reasonable one. I think it’s just the marketing guys got hold of it and said, “Well, what we need is this, and we want shorter that, and guaranteed this, and reversionary this”, and then in the end you kind of built a monster that fell over.

Merryn: A lot of these old products really were the right thing. Split capital investment trusts. Another absolute classic. Divide the return into capital for one of lot of people, income for another lot of people. I mean, that would also work marvellously in this post-pension freedom environment.

I don’t think we need to be designing ultra-smart, really complicated things. I think we just need to listen to what people want

Simon: Back in the early 80s I was in the stock market as a young, fresh-faced blue button and learning all about split capital with investment trusts. A lot of people used investment trusts and I think absolutely, very appropriate for a lot of people.

That actually comes back to the point, I don’t think we need to be designing ultra-smart, really complicated things. I think we just need to listen to what people want. I absolutely agree with your point about, let’s get over this thing about it just has to be income and somehow the sacred capital has to be locked away in a room, not to be touched.

I think there has to be some way of managing money which over the period of however long you live, is actually going to give you a better return, giving you more options about what you want to do with your life. Is that complicated? I wouldn’t have thought so. As long as you can do it in a way that is sustainable, that manages all these different asset classes in a way. Yes of course we’re going to put up our hands and say, “We do this, and so we’d love to have a chunk”, and in a price-sensitive way, I do think that there’s a market that will open up, of people who actually probably will be more discerning, but they don’t want to spend their entire retirement thinking about it.

Merryn: OK, well, thank you very much indeed.

Simon: Not at all. Thank you.