Articles - Freedom comes at a price


The introduction of pension freedoms in 2015 has probably been the most popular change to pension regulations in recent history. But with all freedoms come responsibilities. Putting people in charge of managing their finances in retirement means that they become liable for the complex task of ensuring that their savings last them until the end of their life. As financial planning is a complicated area, the average retiree needs a lot of assistance to do this successfully.

 By Tom Murray, Head of Product Strategy for LifePlus Solutions at Majesco.

 One of the peculiarities of the pension world is the complete reversal of the approach needed to manage them across a person’s lifetime. In the accumulation phase, the principle of inertia is commonly used. Auto-enrolment uses inertia by making it a conscious decision to opt-out of saving and enforcing a need to re-make that decision every three years; otherwise, the employee becomes enrolled automatically. This has undoubtedly played a key part in the huge expansion of people saving for their retirement since it was introduced; As the path of least resistance for employees is to just let it happen and not have to consciously engage with the process in order to reject the saving.

 Standard company schemes use much the same approach; once the contribution is established at the time of joining, it takes an effort of will for the employee to reduce it afterwards, so the vast majority keep saving. And with private pensions plans, the individual does have to meet with their financial adviser to make adjustments; few people are willing to do this and pay the associated fees on a regular basis.

 When it comes to drawing down their pension, the level of engagement of the retiree is automatically much higher, as each decision affects the amount they are receiving each month to live on. The retiree regularly examines ways to increase the amount they can draw down to meet the necessities of day to day living or take up opportunities that suddenly arise, such as a reduced price cruise or a good offer to upgrade one’s car. When the pension is the primary source of income, engagement with their retirement funds increases exponentially.

 Given that most people underestimate their longevity and have little understanding of financial products, most people need assistance in making these decisions. On a limited income, retirees cannot afford to have regular one-to-one sessions with their financial advisers. Understandably, they need to do so when making a major decision, such as an equity release. Still, for the more mundane decisions concerning their lifestyle that they might make regularly, the amounts are often too small to justify discussing them with a financial adviser. Although the amounts may be small, cumulatively, they could significantly affect the retiree’s funds and their capacity to support themselves throughout their post-work life.

 Insurers have a moral responsibility to help retirees understand the consequences of increasing their drawdown in the early years. When clients want to take some more of their funds for immediate expenditure, they need to understand clearly the effect that increasing the depletion of their pension funds will have on their future lifestyle.

 This need can best be served by having customers portals designed to be used by end customers to help them understand the effect their choices will have on their wealth. Forward-thinking insurers are providing digital portals to their customers, enabling them to access their data and do ‘what-if’ scenario playing, e.g. “what if I withdraw £2,000 to go on a cruise?”. Graphical interfaces are the best way to make the range of outcomes to their future incomes, and thus the risk level, obvious to the customer.

 Combining this with links to guidance information and government/industry body websites enables the customers to use the portal as their one-stop-shop for financial decision making. If they find themselves getting overwhelmed, they can choose to contact their insurer to get answers to specific questions or arrange a meeting with a financial adviser, ensuring that the customers’ best interests are maintained.

 Correct decumulation poses a big challenge for retirees. The penalty for getting it wrong is either a failure to benefit as much as they could from the fruit of their life’s savings or ending their days in poverty if they burn through their savings too fast. Decumulation is also a big challenge for pension providers as they strive to ensure that they support their customers correctly through this challenging process. Technology is the only solution to this challenge, and insurers should be seeking to provide the digital services that will support their customers to walk this tightrope.

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