Providers are revising products offered to defined contribution pension scheme members to incorporate greater risk in the decumulation phase, as a result of the greater flexibility afforded by the Budget.
The industry has focused on alternatives to traditional lifestyle strategies and annuitisation since the Budget changes reduced the tax on taking savings as cash, and increased the amount that could be accessed through drawdown.
You still have to be careful of the drawdown effect, you have to protect against the downside risk
Damian Stancombe, Barnett Waddingham
Legal & General Investment Management has announced the details of its real income growth strategies product, which it says will lend itself to the greater options available to members at retirement.
“At the very simple level it provides an income and you can draw down the income,” said Lance Phillips, head of equities at LGIM.
The fund will have a mix of 60 per cent equities and 40 per cent investment-grade bonds and its target will be to deliver inflation plus 4 per cent over a rolling three-year period.
Members could sell some of their units in the fund on retirement and draw more down each year, Phillips said.
The fund manager is also considering offering unit-linked longevity insurance with the product, with members nominating a life expectancy. “If you’re still alive at 85 you get a whole bunch of units back,” said Phillips.
Provider Friends Life has said while it already has a drawdown option it is “developing a refreshed and enhanced offering which will be available later this year”.
Fellow provider Axa Life Invest, part of the French financial services group that provides retirement products, last week launched a drawdown option, which allows members to take income out at the start of their retirement.
The Budget changes mean members can now afford to take greater risk during the decumulation phase, consultants have said.
Some members could even now afford to “stay on-risk” until the age of 75 or 80, said Damian Stancombe, head of employee benefits at consultancy Barnett Waddingham.
“But within all of that you still have to be careful of the drawdown effect, you have to protect against the downside risk,” he said.
He added purchasing a deferred annuity at 65, which does not kick in until the member is aged 80, could help with this.
Andy Cheseldine, partner at consultancy LCP, said that, in general, if someone was looking to invest over 20 years it would not be recommended to them to put their money into bonds.
“In some ways you could agree that up until now retiring at 65 was from an investment perspective not quite sensible to do,” said Cheseldine.
This has led some providers to look at drawdown products that will be invested in more risky assets depending on a member’s projected life expectancy, he said.
Cheseldine said he has also heard managers “talking about stop-loss inflation insurance”, which pays out to members who have purchased an annuity if inflation rises above a set point.
This quarter's edition of The DC debate, published on pp12-15, focuses on the question of what George Osborne's intervention in the retirement market means for savers and providers.
