Advice key to helping consumers make most of pension freedoms

New research published today by the Association of Investment Companies (AIC) suggests that, as consumers warm-up to the new pensions changes, they are going to need advice to help them make the most of them.

44% of the adults surveyed said the changes made them feel more positive about pension schemes.  More than a quarter (26%) of those who plan to retire said they were more inclined to increase their pension contributions as a result of the changes.

However, 27% of respondents who plan to retire said they did not know how much of their pension pot they would be willing to invest in an annuity and only 2% said they would be willing to use their entire pension fund to buy an annuity.  Inflation, the inability to pass on assets after death and the inability to cancel an annuity were suggested as key reasons discouraging consumers from purchasing annuities.  This suggests that many consumers would benefit from good quality, independent advice to help them consider their options and build a tailored portfolio to meet their needs in retirement.

The research was carried out by YouGov for the AIC amongst 3,147 UK adults in full-time work (aged 40 or above), with a gross personal income of £50,000 p/a or more.

The AIC is publishing this research as part of its series ‘Freedom in pensions’ looking at how investment companies can be used to build a long-term pension portfolio, as well as their unique advantages in delivering a higher or growing income in retirement. View the new AIC guide An adviser’s introduction to investment companies

Opportunity for advisers

Ian Sayers, Director General, Association of Investment Companies (AIC) said:

“Whilst consumers welcome the new pension freedoms, many are not certain about how they will take advantage of them.  For those who see a secure income as critical, an annuity may well remain the best option.  But there is also a significant body of consumers who appear willing to consider other options which might help protect their income against inflation and allow them to hand on assets to their friends and family.  These raise challenging questions, which is why the AIC believes that good quality, independent advice will be crucial for many.

“It is good to see that consumers recognise that planning for an income in retirement is a long-term affair, which is where investment companies come into their own.  With their ability to smooth dividends and access to a wider range of income-producing assets, investment companies have some unique advantages over other funds when it comes to delivering a higher or growing income.

“This is a real opportunity for financial advisers to develop new relationships with some of their clients which last well after the day they decide to retire. And for those clients that can accept the risks, investment companies are an obvious candidate for part of a long-term income portfolio in retirement.”

Why consumers like the changes

When asked why these changes made them feel more positive towards pension schemes, the key reasons given were:

• 70% - the flexibility to access their money should their circumstances change
• 60% - the flexibility to invest their money in other assets and withdraw cash as needed
• 57% - felt annuities represented poor value for money
• 45% - the ability to invest their pension in other assets which pay a higher income
• 45% - the ability to invest their pension in other assets which will grow over time
• 45% - the ability to pass on assets when they die.

But uncertainty remains

The research highlighted that views were mixed on annuities. 35% of respondents who plan to retire said that they would not be willing to purchase an annuity with any of their pension fund. 27% said they did not know how much they would invest in an annuity. Only 2% said they would be willing to use their entire pension fund to buy an annuity.

When asked what might discourage them from purchasing an annuity, top answers given by respondents were:

• 72% - the impact of inflation on a level annuity
• 67% - being unable to pass anything on to their family/friends
• 67% - being unable to cancel an annuity at a later date
• 53% - the starting income for a level annuity was too low
• 53% - the starting income for an escalating annuity was too low
• 48% - the impact of inflation on escalating annuities

The wish list

When those respondents planning to retire were asked how important different factors were in determining what options they would choose to fund their retirement, key factors chosen as very important were:

• 66% - having a secure income
• 49% - have a reasonable income from the first day of retirement
• 30% - having an income that increases over time
• 30% - having a flexible income in the event of a change in personal circumstances
• 27% - having an income that allows them to pass on assets on death

A long-term approach

The research showed that people recognise that planning for an income in retirement is a long-term affair.  59% of respondents who plan to retire believed that they will be in retirement for 20 years or more.

View the new AIC guide An adviser’s introduction to investment companies

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Notes

1. All research figures are from YouGov Plc. Total sample size was 3,147 UK adults aged 40+ in full-time employment, with a gross personal income of £50,000 p/a or more.  Fieldwork was undertaken between 5t h- 13th August 2014. The survey was carried out online.
2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs.  The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help Members add value for shareholders over the longer term. The AIC has 352 members and the industry has total assets of approximately £116 billion.
3. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance.  The value of investment company shares, and the income from them, can fall as well as rise.  You may not get back the full amount invested and, in some cases, nothing at all.