Freedom and Choice in 2016: the changing shape of retirement products

Out-Law Analysis | 11 Jan 2016 | 9:49 am | 4 min. read

FOCUS: The next generation of retirement savers will still want the certainty of a guaranteed income offered by traditional annuities, for part of their retirement. Recent reforms will encourage providers to create genuinely innovative products that will provide just that.

The so-called 'Freedom and Choice' agenda has opened up opportunities to defined contribution (DC) pension scheme members who previously had few options available once they reached retirement age. Cashing out or staying invested, annuitisation or drawdown or a combination of these may be the best option for the individual depending on their circumstances.

If pensions move to an ISA-style tax regime, as hinted by the UK government in a consultation paper last year, further innovation will almost certainly follow. Some of the trends, however, are already beginning to emerge.


Consumers still want the certainty of a guaranteed income but, with increased freedom, the pattern of the 'buy' decision has changed. In response, some annuity providers have created 'blended' products which offer a combination of staying invested with withdrawal facilities, while using some of your funds to buy a guaranteed income stream. Return from the investment and the regular income stream can either be accumulated in the product or taken out, while the customer can progressively switch into the guaranteed income component at will or on a phased basis over time.

These products represent genuine innovation, or adaptation, specifically for the new market created by these reforms. For the annuity provider, they capture the future annuity customer while allowing the customer to pursue a stay-invested strategy for the time being. For the customer, they allow a low cost method of investment which can be matched to the individual's appetite for risk.

The recently-published Retirement Income Market Data from the Financial Conduct Authority (FCA) points to annuities being more attractive to those who access their pots later, up to age 70. Starting off in drawdown and moving to annuity later is exactly what the blended products are designed for.

Master trusts

Following the expansion of automatic enrolment, large scale multi-employer 'master trusts' have grown to dominate the workplace pension market. These trusts are now beginning to develop stand-alone retirement products which will allow them to retain the assets of retiring workplace customers - or even to attract retirement business from outside of the master trust customer base.

There is much to be said for one vehicle handling both the accumulation phase and retirement phase of the customer journey. Master trusts may ultimately become part of fixing the 'missing link' between the passive accumulation phase, where everything is managed for the individual, and retirement, where the individual is effectively 'cut loose' to fend for themselves.


For those staying invested, an emerging risk is one of over-prudence: not taking enough risk in the investment strategy, leading to poor returns and later life poverty.

For those that can afford it, this can be managed by taking financial advice. For others, basic asset allocation model portfolios have been developed to suit different risk appetites. However, providers are currently nervous about releasing these and their associated guide tools because of the real risk of being found to have provided financial advice.

Synthetic annuities

Synthetic annuities have yet to emerge. These products will offer a combination of longevity tools to estimate how long the customer will live, and basic asset allocation portfolios to deliver that person's desired income shape over their predicted retirement life.

Crucially, these products will not offer a guarantee – making them cheaper than traditional annuities but obviously more risky. The risks of providing for the later years of retirement could perhaps by hedged by putting aside money in the first phase of retirement, from age 65 to 75, with which to buy a deferred annuity at age 75 to kick in at, say, 80.

Default funds

Default strategy for workplace schemes is still an evolving area. Many schemes have now changed their approach to disinvestment to target drawdown, rather than annuity. However, that begs the question of what shape of drawdown is being targeted: income-producing assets only or a combination of income assets, cash holding and, with the evolution of blended products, guaranteed income as well.

We will see increasing sophistication emerge around default strategies, with 'best of breed' schemes offering a range of default strategies for customers to choose from.

Buy to let

The Treasury has now twice raided the buy to let market, initially with a lower rate of tax relief on mortgage payments and, more recently, a new 3% additional stamp duty land tax (SDLT) rate. Cashing out your pension to fund buy to let property now looks less attractive and, consequently, more money will stay invested within pensions.

A pension credit card

It is theoretically possible to combine payment services with pension services to deliver 'pension credit cards'. The point of this is to increase the ease with which individuals can spend their pension pots. After some initial hype, things have gone quiet - but, in time, these credit cards could be common and could even allow a form of 'pensions cash back' when using pension funds to pay for the weekly shop.

The role of platforms

Platforms will be the big winners out of this new market. As drawdown becomes a mainstream decumultation product, the money that would otherwise have gone into annuities has got to sit somewhere. Platforms enable control and transparency for little cost, while giving consumers the ability to manage their pension and non-pension money in one place. And, when the time is right to start buying annuities, platforms can help with the procurement process.

The challenge for platform providers is pricing pressure: margins are low and getting lower. The IT kit required is expensive and constantly needing to evolve in order to stay ahead. Expect to see the long-predicted consolidation in the platform market actually starting soon.

Simon Laight is a pensions expert at Pinsent Masons, the law firm behind