ANNUITIES. INVEST A LITTLE TIME FOR A LOT OF VALUE.

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1 FOR FINANCIAL INTERMEDIARIES ONLY. NOT APPROVED FOR USE WITH CUSTOMERS. a fresh perspective ANNUITIES. INVEST A LITTLE TIME FOR A LOT OF VALUE. Raising awareness of the need to put effort into securing the right annuity... It s an old joke: they say retirement is a long time coming. But while we re waiting, time is ticking on and clients expectations for life in later years are changing. On the positive side we re living longer and staying healthier. Yet our purchasing power and ability to stretch our income seems to be diminishing. So how can you help your clients best prepare for their retirement? It s a brave new, older world Let s start with some food for thought. For the first time since records began, there are more people in the UK aged 60 and over than there are aged under Slowly but surely, we re all getting older and we re living longer. This could be a reflection on cultural changes and better food, more awareness and a political shift towards welfare for all but, in the main, it s more likely to be down to medical advances: people now recover from, or are left better equipped to deal with, many conditions that were once considered to be life-threatening. Population projection for 60 year olds Thousands Source: ONS In fact, projections show there will be around 698,000 people turning 60 in 2013, and as many as 875,000 reaching that age per year by the time we reach Current estimates also tell us that, on average, men aged 65 will live until they re 83 years old; women will survive until they re 85 3,and as many as 1 in 5 of the current population could live to see their centennial birthday 1 which is good news for almost everyone except annuity providers.

2 Statistics are fine and dandy, but what impact do they actually have for you? More clients, perhaps? Possibly. For the financial industry as a whole, it means growth and a need for change: it s no surprise that the size of the UK annuity market has increased by 30% in the last three years moving from 10.8bn pa in 2009 to 14bn pa in 2012, with over 420,000 annuity cases written in 2012 alone 4. But it s not just the number of annuities that s changing, it s also the average size of the annuity pot and the notion of retirement itself. Thanks to changes in legislation, many may stay in employment for longer some out of choice, some out of necessity. Either way, the notion of a definitive retirement age is fast becoming outdated: Then: Point of retirement Receiving a standard annuity Point of retirement Receiving a standard annuity Phased retirement period Receiving a tailored annuity Now? Phased 60 retirement period Age of candidate Receiving a tailored annuity Age of candidate In , the average amount available for conversion to an annuity (taking all annuities into consideration) was somewhere in the region of 23,500. By , that had increased to almost 33,500. Good news? Yes, on the surface at least. (Although if we re honest, and take inflation into account, then the income levels available from that size of pension pot aren t what most people would call inspiring and it does beg the question, what are retirees actually using to pay their bills?.) Knowledge is everything The emphasis on financial education has also changed and clients are, we hope, gradually taking a greater interest in managing their own affairs. As a result, they ll become more aware of the Open Market Option (OMO), even if it s still below the 50% mark. Using case numbers as a measure, OMOs have gone from 35% in to 47% in What s more noticeable though, is the growing number of retirees who are choosing enhanced annuities for their long-term income figures are up by over 10% in less than four years... but what is the connection? Medical advances enable more of us to live longer, surviving with impediments or reduced physical conditions and this means that there are likely to be more people, living with imperfect health conditions, who could be eligible for an enhanced annuity.

3 The future may not be so bright... Now for some not so good news. It s an unpleasant realisation for anyone who s not keeping up to speed with updates from the financial industry on a daily basis a.k.a. clients but the building blocks of long-term retirement income are less firm than they once were. Consider these points: Annuity rates and gilt yields both are close to being at their all-time lows. Low interest rates savings are being eroded by a combination of inflation and low interest rates. Final Salary Pension Schemes rising costs have made these prohibitive for many employers; some predict these will be consigned to history within three years. 6 The basic state pension this is now just pw ( pw for a married couple), making the UK s state benefits now among the lowest in Europe. 7 The situation is worse when we consider other challenges being faced by retirees such as longer retirement, rising costs, and personal debt: another culture shift over the last couple of decades means that borrow-now, pay-later could eventually also have a notable impact on income in retirement....but everyone has a future, don t they? The harsh truth is, just over a quarter of today s pensioner couples in the UK have less than 1,500 1 in savings. And while many people anticipate a significant gap between their retirement savings (expected to last seven years) and their actual retirement (expected to last 19 years), a significant percentage (34%) still do nothing about it. 8 So who s responsible for making sure we can look forward to a happy, well-funded retirement? In one respect, the State is shifting its focus already: helping to keep people off or cope with being on the poverty line, if times do get hard later on in life. There s been an increase in discussions about funding levels for long term care and there s been an acknowledgement that, while people staying at work as they grow older could be a benefit, it s going to be a balancing act: ensuring jobs for younger generations too. On the other hand, the responsibility lies with advisers, providers and to some extent educators and the media, to spread the word and encourage individuals to seek good advice, and great value for money when they re moving into retirement.

4 Good advice Good advice is priceless. Advisers experiences and insights should not only have a direct bearing on the capacity to maximise retirement income, but also be beneficial in navigating the minefield of hidden idiosyncrasies in our industry often compounded by a lack of education, and misconceptions promoted in the media. A product that protects me is more expensive if I m unhealthy but an income for life gives me better value if I m ill? Err, yes. Disclosure isn t just a process, it s a pivotal aspect of ensuring the best possible deal when it comes to securing an annuity for life. Retirees may be wary of disclosing details about their poor health, given the adverse affect that this would normally have on their life assurance. For many, it s counterintuitive and often surprising the positive impact such disclosure can have on their retirement income. So what happens next? Picture a typical client, approaching retirement. If you ve provided a successful annuity service, is that it? Do you see them disappearing into the sunset, never to be seen again? How can you make an equivalent income from providing advice, rather than providing commission-based products? Smart financial advisers have spent time making people more aware of their services in general, and they ve broadened their proposition making sure it offers an all-encompassing end-to-end service, addressing as many aspects of the financial journey as possible. The trouble is, at the far end of that spectrum, we think there s often been a temptation to evaluate older clients by taking a view on the size of their pension pot: is it really worth getting involved, if there s only 30,000 to play with? We think it is. You may have a metaphorical breakpoint, at which you consider it s not economically viable to engage a new client, but the trick is to engage with them in a way that s economically viable for you, but attractive and logical for them by giving over time advice. We ll explain.

5 Over time How many clients have you helped into retirement, presenting them with pension fund options or even arranging annuities for them? And how many of those clients do you still see on a regular basis? Some advisers work out how to restructure their fees in a way that ensures their costs are covered and their business model remains viable while at the same time fully embracing the new possibilities that emerge during retirement. After all, the chances are that some of your ageing clients if they ve moved into the retirement phase of life themselves will have inherited money from family estates since you last saw them. What are they doing with those funds? Where are they being kept? How are they being considered as a dormant resource for a younger generation, emergency cash for grandchildrens birthdays, or a much-needed contribution to long term care costs? As new providers and products enter the retirement market, and as the industry is embracing individuals desires for greater choice and more flexibility in later life, we re starting to see greater scope for relationships to be nurtured over a longer period of time, which means greater opportunities for you in the retirement market. So our suggestion is to consider the idea of over time advice: re-engaging with clients who are now retired, prompting them to contact you for advice on managing their funds effectively now and in the future, perhaps helping with mortgage debt, equity release options, inheritance tax planning and long term care funding options for the future. 1 Later Life in the UK Jan 2013, Age UK based National Population projections. Office for National Statistics. (ONS). 3 Office for National Statistics. (ONS). Life expectancy data ABI full year ABI Full year Warning over final salary schemes as combined pension fund deficit grows. The Guardian. 14 May More than 1 in 5 British pensioners at risk of poverty. The Independent. 8 June The Future of Retirement published in 2013 by HSBC Insurance Holdings Limited, London Just Retirement Limited. Registered Office: Vale House, Roebuck Close, Bancroft Road, Reigate, Surrey RH2 7RU. Registered in England Number Just Retirement Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Please note your call may be monitored and recorded. 10/2013 JR00822_DS15951_240414