old age pension amount is heavily reduced," he says. "Those drawing state benefits can get big transport concessions and discounts on using telephones for instance. So if you've got a £40k pot then it makes sense to use that to pay off debt, purchase new white goods etc."
So given that a huge DC market such as Australia is looking closely at the annuity market is the UK right to be moving away from it?
The Financial Inclusion Centre director Mick McAteer has major concerns about the shift. "The annuity market needed to be reformed but this could have been done and was happening what with the rules on allowing people with small funds to take as cash being formalised," he says. "We also had the FCA doing work on competition in the annuity market. The way things have gone now means that we are offering less value with more risk." McAteer believes a lack of understanding about how the asset management industry works potentially means retirees will be exposing themselves to intolerable market risk if they choose to take up one of the many new investment-led solutions that will come to market. "I have a range of concerns around the kind of products and advice that will come to market," he says. "There is a misunderstanding as to why annuities appear to be poor value for money. This is down to conditions in the money markets and low interest rates affect non annuity products as well as annuity products. To put together the same level of income with an asset management product is much more complicated and exposes the client to major market risk. Annuities bring a degree of certainty and there is less need to revisit advice. Now people will need regular reviews to ensure their strategy is right for them and the cost of advice will go up." Vanguard's Center for Retirement Research principal Steve Utkus believes that asset managers will need to change their approach if they are to develop suitable income drawdown products. However, he believes it should be seen as a call to action for the industry to develop best practice. "The most striking thing about the UK is the focus is on asset management rather than the process of retirement income generation," he says. "In the US and Australia companies are starting to think about the withdrawal process that needs to be put in place for defined contribution. We need to work out what is best practice here." He continues: "The challenge is a dual one. Asset managers need to move away from managing peoples' portfolios and look at how they can start delivering income streams people can rely on. Insurers also need to look at how guarantees can play a role going forward. There's a lot of deep thinking to be done about guarantees and how to develop transparency and price competition in the annuity market. The UK industry needs to look at it as a call to action to provide world class guaranteed income." Another important factor to the UK reforms will be education. If people don't understand the decisions they need to make then they risk getting poor outcomes. In Osborne's Budget speech he launched the guidance guarantee - a service providing retirees with free guidance on their choices. However, Cooper has concerns as to whether such a service goes far enough. "In the accumulation phase the guidance is fairly generic- save early, save hard but when you get to retirement it becomes more individual and I wonder whether the guidance guarantee is going to be good enough," he says. "The workplace can be a very good way of delivering this information and we will see particularly larger, well-funded employers looking to do this more." Tor Financial's Harris has similar concerns and urges UK employers to get more involved in a similar way to their US counterparts. "In the US and Australia we don't have quangos such as the Money Advice Service (MAS) and The Pensions Advisory Service (TPAS)," he says. "In the US guidance is delivered in the workplace and we are seeing a ‘financial friends' ethos by which people are being engaged in their mid-50s. The approach is that people know
CIPP Policy News Journal
08/04/2015, Page 337 of 521
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