Now that the Chancellor’s reforms have put annuities firmly in the doghouse, the question is what type of product is likely to be the most popular among those about to retire. The general industry mood reflected in the financial press seems to lean towards income drawdown style products as being the most likely selection for those who don’t want to buy an annuity.
However, this may be more of an industry feeling rather than a well-researched conclusion about where people will put their pension pots. A recent survey by Friends Life put the problem very clearly. When people were asked to rank issues in terms of their confidence to explain them to another person, only 1.35% selected Income Drawdown. This compares badly to the 2.4% who felt they could explain particle physics and the 1.8% who could explain the big bang.
Such a level of discomfort in terms of explaining the product does not augur well. Clearly there is a big problem in getting people to understand the benefits of a drawdown-style product as part of their retirement planning. There is unlikely to be a large surge towards income drawdown unless the industry becomes better at selling its advantages for someone who is taking retirement.
The guidance promised by the Chancellor is unlikely to clarify sufficiently, as those delivering it will be so wary of appearing to recommend that they will over-complicate their explanations by focusing on the negatives. Many retirees will not be able to afford independent advice focused on their own personal needs and therefore will have to make up their mind based on poor information that is excessively caveated.
Drawdown products are in need of a major publicity push to ensure that people understand the basics of the product. Without this, the attraction of more easily understood investments such as property to provide a retirement income remains very strong. People have a very clear idea about how the rental market works and generally feel they understand how to make a living from it. The dangers of putting all their nest eggs into a single ‘rental-income’ basket, will not be pointed out to them by estate agents as they are under no obligation to do so.
The danger is that people who are at a vulnerable stage of their lives and who have lived years without bothering about the financial services sector are suddenly being asked to make the kind of decisions that they have no capacity to make. An industry-led campaign is needed to explain the basics of drawdown products if we are to ensure that people who are about to retire have a clear view of how the product works and how it will benefit them. Without this, a lot of the new drawdown style products currently in development will be completely ignored.
Google Plus: TomMurray
What do you think?
Let us know in the comments below!