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Retirement mapping tool launched as part of decumulation research

Scottish Widows has launched a ‘retirement matrix’ mapping tool as part of research into decumulation.

The pension provider launched the cubic mapping tool to assist advisers and retirees better plan their income as part of its ‘Decumulation: Understanding the Needs of the Nation’ report.

The research on 1,500 retirees and near-retirees found several “gaps in the market” between members’ retirement expectations and the decumulation products they choose.

 

Retirement preferences

It found while the majority (80%) said they wanted a “guaranteed income for life”, only a minority are currently choosing annuities, while the majority are choosing products where retirement income is dependent on investment returns (despite 55% saying a predictable income would be important for budgeting).

The ‘retirement matrix’ presented four decumulation options which offered different levels of certainty, flexibility, consistency, variability and legacy from a unitised annuity, which would offer the most certainty, but, to a ‘with profits drawdown’, which would offer more flexibility, consistency and leave something to pass on.

Other options included income drawdown, which would prioritise variability, flexibility and leaving something to pass on, while a standard annuity would offer the same benefits as a unitised annuity, but with more consistency.

Almost half (43%) of respondents said ‘control’ (i.e. income for life or being able to choose their spending) was their primary decision point, while fewer (33%) selected ‘legacy’, and one quarter (24%) selected ‘consistency’ of their monthly income.

The research also ascertained customer demand for each of the eight nodes of the cubic ‘matrix’, with most prioritising consistent income and being able to pass something on to dependents (32%).

In addition, one third (38%) said having ‘choice architecture’, or having a provider offer a specific outcome following a series of questions, in customer conversations would be preferred, while fewer preferred full or simplified advice, or guidance (14%, 14% and 17%, respectively), and 18% preferred none of these options.

Following the Financial Conduct Authority’s (FCA) advice/guidance boundary review, the research also looked into whether members would prefer one of four options involving ‘guidance +’ (or helping members make their own decisions), choice architecture, simplified advice (where a partly qualified adviser answers a specific question) or full advice.

Option two was found to be the most popular at 36%, followed by ‘guidance +’ (17%), and the final two options (14% and 14% respectively).

However, those with higher pot sizes (more than £300,000) preferred the fourth option (28%).

In terms of receiving advice, respondents were most likely to want to know about all their retirement finances together or all their combined pots (34%), rather than on an individual pension pot (28%).

Retirement planning

The report also found pensions literacy was mixed, with two thirds (58%) concerned about running out of money in retirement, while 44% had not considered different retirement income options, and one quarter (26%) did not know the value of their pension pots.

A similar percentage (27%) expected their defined contribution (DC) pension would provide around one quarter of their retirement income, while 25% thought this would provide around half, and 19% thought it would account for less than 10%.

Recommendations

The report concluded to address decumulation challenges, products could be used “in tandem” and savers priced out of financial advice could also be better supported to “blend” existing products – with conversations focusing on all pension saving products a useful tool.

A decumulation-only collective defined contribution model could also help if flexibility is “built into the rules”, and savers are given more predictability so pots can be passed on – noting “clear communication” is essential to help savers.

Head of policy Pete Glancy said while auto-enrolment (AE) had helped savers make progress on their pension pots, progress on accessing pension pots could also need a “similar shot in the arm” given the “daunting and complex” process for members, as well as the potential inaccessibility of advice for some members, and regulatory and legislative changes.

“People are telling us loud and clear what they want, but not everything they want is currently available, or indeed permitted. Continued collaboration between the pensions industry and policymakers is required to determine what is needed and then deliver it.

“This research is another illustration of why an independent Long-Term Savings Commission, that considers UK financial resilience in the round, is necessary to deliver the future we want for Britain in retirement.”

Retirement managing director Emma Watkins added that helping members with retirement adequacy should be a “national priority”, with the research highlighting customer needs and how members “need better support when it comes to making these important retirement decisions”.

“This research and the retirement matrix model can help pension schemes and providers to design products that meet customer needs, within the bounds of what is permissible today, and help inform the policy debate on what could be permissible tomorrow.”