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Rethinking retirement

in the UK
Contents

1. Foreword 4
2. Executive summary 6
3. Introduction 8
4. Aviva’s proposals
The Open Market Option 10
Creating an annuity market fit for the future 12
Addressing customer needs 14
5. Conclusion 16
6. Glossary 17
Foreword

The market needs to evolve to


meet the needs of the current
generation of retirees, who are
facing the twin issues of increased
longevity and reduced income.

1.4 Bluntly, the products and services available to savers as


they approach and enter their retirement are failing current
pensioners and this will only get worse as greater numbers of
people retire each year. The market needs to evolve to meet
the needs of the current generation of retirees, who are facing
the twin issues of increased longevity and reduced income.

1.5 The recent publication of the Government’s Green Paper


on moving to a simpler, flat rate state pension is a great step
in helping people understand what benefits they’ll be entitled
to when they approach retirement. But it is remains hugely
important that customers also have access to better information
and easier ways to maximise their pension pot.

1.6 Customers need the industry to provide simpler ways


1.1 The face of retirement is changing. People are living longer to shop around for a retirement income, lower costs to
on less money. amalgamate their small pension funds into one and holistic
advice on all the financial issues surrounding retirement.
1.2 The current retirement framework dates back to the time
when the majority of people had a defined benefit company 1.7 Aviva is uniquely placed to kick-start the debate and
pension scheme, giving them a security of income which is lead the change. We are the only insurance company in the
lacking for today’s retirees. UK that is actively engaged in all areas of retirement saving,
income and planning by offering consumers ways to:
1.3 Future pensioners face a very different retirement landscape.
Few have a final salary pension scheme from their employers ● Save for retirement through personal and group pensions
and many will have a number of small pension pots from and investments.
different employers accumulated over their career. This fractured
retirement planning means people face a retirement income ● Manage their finances into retirement with a full suite of
often significantly smaller than their current wage, leading retirement products – the At Retirement range.
to more reliance on the state and growing levels of debt and ● Access a range of retirement advice services.
poverty. Others will find they cannot afford to retire at their
chosen age and are forced to work for a number of extra years
to build up their pension pot or perhaps pay off debts.

Customers need the industry


to provide simpler ways to shop
around for a retirement income

4 Aviva Real Retirement Report


1.8 Aviva has long campaigned to help customers understand 1.10 We are also seeking to stimulate debate and action that
they can shop around to buy a retirement income – what encourages people to save enough throughout their working
insurers call taking the ‘open market option’ - and to make lives to meet their aspirations in retirement. Our Mind the
it clearer that they do not have to take an annuity from the Gap study, published in autumn 2010, called attention to
company they have saved with. We have run multi-million pound the savings gap and suggested actions governments could
marketing campaigns in recent years urging retirees to shop take to help address it. Our Future Prosperity Panel has
around and invested in improving our services to help customers brought together thinkers across the world to build a greater
navigate the complex decisions they have to make at retirement. understanding of the financial issues affecting our customers,
and what can be done to make a difference in the future.
1.9 We have also championed the needs of pre- and post-
retirees though our Real Retirement Reports, which for the past 1.11 Now the debate needs to translate into actions. Rethinking
year have tracked the attitudes and financial concerns of people Retirement in the UK sets out a series of measures we believe
approaching and in retirement. We have used these findings are necessary to address the issues facing the market today so
to add to the national debate on retirement to ensure any new it can properly serve the needs of tomorrow’s retirees. It is up
services or initiatives are built around the needs of the very to all of us - the retirement industry, government, regulators,
people who will use them. employers and individuals alike - to act on these solutions
now to help provide prosperity and peace of mind for future
generations of retirees.

Andrew Moss
Group Chief Executive, Aviva

Aviva has long campaigned to help


customers understand they can shop
around to buy a retirement income

Aviva Real Retirement Report 5


Executive summary

2.1 The UK is facing a significant population change with


increasing numbers of older people coming up to retirement.
But the current retirement market is already failing today’s
generation of retirees and will continue to do so with serious
consequences for the retirement income and security of future
generations of older people. To put this in to context, 385,000
people purchased annuities in 2010 alone and figures indicate
that only 32% of customers bought annuities from a different
company to the one they saved with.

2.2 There are inherent weaknesses in the current system,


such as the potentially high cost of moving between pension
providers and the fact that some companies choose not to
make their annuity rates publicly available for comparison. These
weaknesses have shaped today’s retirement environment, where
shopping around for the best deal isn’t the universal action it
should be for customers.

2.3 However, there have been a number of Government


initiatives aimed at meeting the current and future needs of
retirees. The removal of compulsory annuitisation at age 75 has
given a small proportion of retirees more freedom to use their
savings and assets in retirement to best match their income
needs. From October 2012 onwards, automatic enrolment into
pensions will be introduced and the new National Employment
Savings Trust (NEST) could offer pensions to as many as six
million people. And the Government’s Green Paper on moving
to a simpler, flat rate state pension in the future is a great step
in helping people understand what they’ll be entitled to when
they approach retirement.

2.4 To meet the needs of tomorrow’s customers, Aviva


believes that the market must have full transparency, making
it easy for customers to compare best rates and giving them
access to the right annuity for their circumstances. To achieve
this, it is crucial to ensure customers can easily get the right
type of advice to suit their needs and can automatically
access to enhanced rates through the introduction of fully
underwritten annuities.

There are inherent weaknesses in the current system, such as the


potentially high cost of switching and the fact that some providers
choose not to make their annuity rates publicly available for comparison.

6 Aviva Real Retirement Report


Aviva believes it should be as simple
as possible for every customer
to choose the level of support
they need when making financial
decisions about their retirement.

2.5 Rethinking Retirement in the UK sets out a number of key Proposal 3: Reducing the costs of
changes Aviva believes are vital to make it easier for customers switching providers
to understand their financial options as they approach 2.8 When the FSA’s Retail Distribution Review is implemented
retirement and help them choose the retirement income they in 2012, the way customers access advice and guidance about
deserve. We believe that the required changes are: their annuity is likely to split into two broad sections. We believe
Proposal 1: Requiring all annuity providers customers need to be clear on what the right advice or guidance
to publish annuity rates to make it easier for model is for them, based both on what they can afford and what
customers to make comparisons. level of service they want and are willing to pay for. In addition,
we believe that non-advised annuity sales should be subject to
2.6 UK annuity providers are not currently required to publish
the same cost transparency rules as advised sales.
the annuity rates they offer to their customers when they reach
pension age. Many companies already do so – especially those Proposal 4: Streamlining customers’
that are actively marketing their annuity products to new, or retirement savings
‘external’, customers – but there is still a secretive significant 2.9 As switching jobs every few years is now the norm for most,
minority allowing no comparisons. Aviva wants the publication people are increasingly contributing to several private pension
of annuity rates to be made compulsory - no matter whether schemes during their working lives. Aviva research suggests
the provider is offering annuities to the whole, ‘open’ market, that one in three workers (30%) have five jobs throughout their
or takes a ‘closed’ approach by only serving the customers that lifetime. We therefore believe legislation should be introduced
have saved for a pension with them. Aviva also proposes that to allow the automatic transfer of small auto-enrolled pension
examples of the best market rates are highlighted to soon-to- pots, so savings pots follow members when they move jobs.
be retirees when the annuity they are being offered by their
pension company is 10% less than the best rates available in Proposal 5: Helping customers choose an
the market for the same type of product. appropriate level of guidance and advice
2.10 Aviva believes it should be as simple as possible for every
Proposal 2: Including medical questionnaires
customer to choose the level of support they need when
in maturity packs to drive access to automatic
making financial decisions about their retirement. To bridge
underwriting in annuities.
the gap between non-advised, direct purchases, and full
2.7 One of the most noticeable changes in the retirement independent advice, Aviva believes the industry and regulator
market over the past few years has been the rise in the number should press ahead in developing ‘simplified advice’. We also
of enhanced or impaired life annuities. Aviva proposes that suggest a new form of adviser ‘badge’ is created and promoted
basic medical questions are included in all customers’ pension to customers so they know that if they talk to a ‘retirement
maturity packs to ensure those who qualify for an enhanced or adviser’ they will be able to create a plan that addresses all their
impaired annuity are more easily identified by the industry so financial needs.
firms can automatically offer them a tailored annuity.

Aviva Real Retirement Report 7


Introduction

3.1 The world is changing and the way the retirement industry 3.6 So what is being done to help people make the most of their
works needs to change with it. People are living longer and the savings and investments? There are currently products readily available
average age of the UK’s population is rising. According to the such as annuities and equity release that allow people to maximise
Office for National Statistics1, over the last 25 years the number their income in retirement. However the problem is that timely, useful
of people aged 65 and over increased by just over information is not always reaching people and encouraging them to
1.8 million, and the proportion of people over 65 is projected to take the steps needed to effective retirement planning.
increase from 16 per cent in 2008 to 23 per cent by 2033.
3.7 Of course, making the best of use of their savings,
3.2 Over the same period, the percentage of the population investments and assets is just one part of the financial planning
aged 16 or under will decrease from 19% to 18%. Old age people need to do to have a secure and comfortable retirement.
support ratios will therefore fall - in 2008, there were from 3.2 Aviva research found that the largest single source of income for
people of working age for every person of state pensionable the over-55s is the state pension (61%)4, but at the moment two
age in 2008, and this is expected to fall to 2.8 by 2033 – even thirds of people (68%)5 don’t know or overestimate its value.
taking account of future changes to state pension age.
3.8 The Government’s recent Green Paper on moving to a simpler,
Increasing life expectancy in the UK’s ‘Oldest flat rate state pension is a great step in helping people understand
old’ (over 85) what they’ll be entitled to when they approach retirement. Moving
to a simpler system will help address this confusion and with a
greater understanding of what individuals can expect from the
state, people will be better placed to plan their private savings.
3.3m
3.9 Additionally, from October 2012 onwards, automatic
1.3m enrolment into pensions will be introduced. As well as an increased
660,000
number of people saving into existing schemes, the new National
1984 2008 2033 Employment Savings Trust (NEST) could offer pensions to as many
as six million people – those aged 22 or above earning more than
3.3 The current life expectancy for a man age 65 now, is to live
£7,475. Any current employee without access to a good-quality
for another 17.6 years, while a woman of the same age can
occupational pension will be auto-enrolled, though they do have
expect to live for a further 20.2 years. But men born in 2009 are
the option to opt out. They will have a 4% contribution deducted
projected to live for 88.7 years and women for 92.3 years2.
from their salary, with their employer adding at least 3% and the
3.4 While this is great news for individuals, the ageing Government 1% to bump it up to a minimum 8%. While not a
population has huge implications for society as a whole, as perfect solution it should encourage those people to save for their
current pensions and benefits are funded through tax and retirement who may not have done so without the new system.
national insurance receipts paid by those currently in work.
3.10 The current generation of newly retired or soon to be retired
Currently 11.3 million people receive the basic state pension3.
also find themselves part of a new phenomena defined as the
As those in receipt of a pension and other retirement benefits
sandwich generation. They face pressure to care for their own
increases, and the number of working people falls, the
parents and to help their children either financially or through care
government of the day will find itself increasingly unable to
of grandchildren leaving them squashed in the middle.
provide a living income to all those people in retirement.

3.5 The statistics mean people coming up to, or newly retired, face
a raft of financial problems. Not only are they unlikely to have the Retiring with Aviva:
security of a decent defined benefit pension scheme, they also Over 680,000 retirement customers
face falling property values, historically low savings rates and a £20 billion retirement funds under management
government that is unlikely to be able to pay a meaningful state Over 24,500 new annuity customers came to Aviva in 2010
pension over the full term of their retirement. £1.4 billion paid out each year to UK retirees by Aviva

1/2 4
National population projections,2008-based – Office for National Statistics Aviva Real Retirement Report, May 2011
3 5
DWP press office, March 2011 Syndicated “At retirement Survey”, in conjunction with Marketing Sciences, August 2009

8 Aviva Real Retirement Report


3.11 Aviva has been tracking the attitudes and issues facing pre 3.17 Previous generations of retirees typically had less complex
and retired people for over a year through our quarterly Real financial choices – retiring with a more stable state pension
Retirement Reports. These reports divide older people into three system, greater numbers of final salary schemes, and typically
distinct group – pre-retirees aged 55-64, newly retired aged 65-74 with fewer pension pots to juggle due to having fewer jobs or
and long term retired aged 75 years or more, recognising that careers in their working lives. But today retirees face a more
people at different times of their retirement will be facing different complex range of choices. The growth of defined contribution
issues. Currently almost 18 million people – 29% of the UK schemes leaves individuals having to make choices about the
population - are over 55, so their views are increasingly important. type of annuity they need, which may previously have been left
to employers or pension trustees – choosing between a fixed or
3.12 Financial worries dominate all of these age groups and for inflation-linked income or whether to take a ‘joint life’ annuity
good reason. The March 2010 report reveals that, year on year, which secures benefits for a surviving spouse.
their average income has fallen by 4%, the level of mortgage
debt carried into retirement has increased by more than 3.18 People also face the challenge of navigating a sometimes
£10,000 to £65,107 and the number of people with a savings opaque market to find the best value annuity rate for them. As
pot of less than £500 jumped to nearly a third over the year. the market currently stands, too many retirement providers are
happy to take customers’ money but do little to actually make
3.13 The research reveals the paucity of many people’s sure this money buys the best possible pension income when
retirement income provisions. A state pension is the largest their customer comes to retire.
source of income for 61% of people aged over 55, with a work
pension providing the bulk of their income for 38% and earned 3.19 Without the right support from the retirement industry, too
income and wages being most important for 36%. many customers will continue to miss the chance to make the best
retirement choices – they may be too loyal to their current pension
3.14 Differences can be seen in the amount of savings each of provider to realise they might get a better annuity deal with
the age groups have. While 30% of the retired age groups – 65 another firm, they aren’t aware of the positive impact a medically-
plus - derive an income from their savings, more than a quarter underwritten annuity could have on their income, and they aren’t
of pre-retirees has no savings. Only 14% of those already retired shopping around or getting the right level of information and
claimed to have no savings. advice they need.
3.15 Debt is also an overriding worry – especially for an age 3.20 Aviva however believes there are a number of measures that
group that no longer typically has the capacity to continue can be taken to improve people’s retirement finances. The annuity
earning. The March 2010 Real Retirement Report revealed that market was worth £10.8 billion in 2009 (source: ABI) and will
one in seven do not think they will be able to pay off their debt expand rapidly as more people retire, and a greater proportion
in their lifetime and almost a quarter believe it will take them retire with a defined contribution pension. It is therefore vital we
until they are at least 75 to be debt free. Credit card borrowing reform the annuity market now so it offers the best possible value
is the most common debt, owed by around a third of each age to people entering retirement in the future.
group – with an average balance of £3,311, though the largest
debts are through personal loans at an average £5,983. 3.21 The proposals contained in this report would be cost neutral
to the Government, but improve immeasurably the standard of
3.16 This generation does however have property wealth on living and cash flow of people going into retirement.
its side, and for many deriving an income from bricks and
mortar is a key part of their retirement planning. For these
people, downsizing, equity release, renting a room or
buy-to-let form part of their retirement plans.

Aviva Real Retirement Report 9


Aviva’s proposals

The Open Market Option


4.1 Most people do not know what an annuity is or how to get Proposal 1: Requiring all annuity providers
the best one for their circumstances. This ignorance is costing to publish annuity rates to make it easier for
them literally thousands of pounds during their lifetime in lost customers to make comparisons.
income. Last year 426,392 new annuities were taken out by 4.7 UK annuity providers are not currently required to publish
385,000 people, of which 57,982 were impaired life annuities. the annuity rates they offer to their customers when they
But, according to the Association of British Insurers (ABI), two reach pension age. Many companies already do so – especially
thirds bought the annuity on offer from their pension providers those that are actively marketing their annuity products to new
rather than move to a better value product – and in many cases customers – but there is still a secretive significant minority
these customers are unlikely to have researched the market to allowing no comparisons.
find the best annuity for them before they made a choice.
4.8 Aviva wants the publication of annuity rates to be made
4.2 The mechanism to help customers access the best annuity compulsory - no matter whether the provider is offering
is already in place via the Open Market Option - but it clearly is annuities to the whole, ‘open’ market, or takes a ‘closed’
not working as well as it could. Aviva wants the current system approach by only serving the customers that have saved for
to be modernised to make it easier for customers to get the a pension with them.. This should be done is such a way as
best deal they can for their retirement. to allow a fair comparison between rates while protecting
4.3 The main objective for a reformed open market should be commercially sensitive information.
to ensure customers feel confident, supported and engaged 4.9 Examples of the rates a customer could expect to receive
throughout the whole process - from deciding the level of should be published via independent comparison tables
advice they need, understanding what kind of annuity is most compiled by a regulator such as the Financial Services Authority
appropriate for them and looking around for the best rate. (FSA) – soon to become the Financial Conduct Authority (FCA)
or the Money Advice Service. To keep costs to a minimum the
4.5 Maintaining these relationships, and improving the
tables could be displayed on their websites.
information and tools available to consumers, should support
them through a smooth journey to make a confident choice 4.10 However the industry will need to work closely with
about their retirement finances. both organisations to help develop this and to ensure a protocol
is developed to allow various types of annuities to be displayed.
4.6 To this end, we believe a series of structural improvements Further, we believe the government and industry should work
to the Open Market Option process would deliver much better together to develop simple ways to effectively highlight to
outcomes for the UK’s retirees – so that those customers who consumers the better rates they may be able to get by
can get a more appropriate product by shopping around can switching providers.
do so easily, without facing undue barriers to staying with the
provider they saved with if they choose to.

Aviva wants the publication of annuity rates – for both


the open and closed markets – to be made compulsory.

10 Aviva Real Retirement Report


while 51% of people had
heard of an enhanced annuity,
they only accounted for 10%
of all purchases

4.11 Customers receive staggered information from their 4.15 Aviva proposes that basic medical questions are included
pension provider in the run up to retirement, and the second in all customers’ pension maturity packs to ensure those who
phase information packs always contains personal quotes for qualify for an enhanced or impaired annuity are more easily
the customer. We propose providers should verify these quotes identified by the industry so firms can automatically offer them
against currently available market rates – potentially making a tailored annuity. Furthermore, we believe this information
use of industry portals. These packs should make the customer should be used to generate underwritten annuity illustrations
aware that they could get a better retirement income by within the second phase of information the customer receives
shopping around and indicate the possible increase. closer to retirement.

4.12 Further, to help retirees understand the implications of not 4.16 This simple step would radically transform retirement
receiving a market competitive retirement income, Aviva proposes income for many customers in the UK market, as each
that these packs highlight to soon-to-be retirees examples of the would receive a fully underwritten annuity matching their
best market rates, when the annuity the customer is being offered circumstances. Where a customer has a health condition, they
by their pension company is 10% less than the best rates available would automatically receive an annuity rate which factors this
in the market for the same type of product. in and provides access to ‘enhanced rates’ (where appropriate)
across the market.
Proposal 2: Including medical questionnaires
in maturity packs to drive access to automatic
4.17 If a provider chooses not to offer an annuity with
underwriting in annuities.
medical or lifestyle underwriting to a customer with a medical
4.13 One of the most noticeable changes in the retirement or lifestyle condition, we believe the provider should be
market over the past few years has been the rise in number of compelled to tell the customer they could potentially receive a
enhanced or impaired life annuities. These are annuities which significantly better annuity rate in the Open Market.
use medical underwriting to provide a higher than average
income to people with conditions or lifestyles that are likely 4.18 Based on our experience of including these medical questions
to reduce their life expectancy – such as obesity, asthma or as standard, Aviva believes there is also an important consumer
diabetes. However, the Association of British Insurer’s Annuity education issue around annuity medical questions. Customers can
Purchasing Behaviour paper reveals that, while 51% of mistakenly believe that declaring medical information will have an
those surveyed had heard of an enhanced annuity, they only adverse effect on their retirement income - making some people
accounted for 10% of all purchases. reticent in sharing this information. One in ten consumers Aviva
4.14 Whilst the rising number of enhanced and impaired surveyed said they would withhold medical information on an
life annuity sales is intrinsically a good thing, these policies annuity application form for fear that it would affect their pension
have typically been sold to customers receiving advice – 93% income, and over a fifth their income may decrease as a result of
according to the ABI report. This means there is a significant any medical conditions.
proportion of the market which does not have automatic access 4.19 An industry-wide initiative to help customers’
to enhanced annuities – regardless of whether they turn out to understanding is needed, to play a key role in increasing the
be eligible or not. take up of enhanced and impaired life annuities. It needs to be
explained clearly that providing adverse medical information will
only ever improve the income on offer, never reduce it.

6
ICM Research for Aviva, April 2011

Aviva Real Retirement Report 11


Aviva’s proposals

Creating an annuity market fit for the future


4.20 Over the past 20 years there has been a dramatic change 4.24 We believe customers need to be clear on what the right
in the demographics of the retirement market place, which the advice or guidance model is for them, based both on what
industry as a whole has been slow to respond to. The two key they can afford and what level of service they want and are
changes are that today’s retirees are living longer than ever willing to pay for. However, currently we are concerned that in
before and the way they have built up their pension savings is some cases, the transparency being introduced into the advised
different to previous generations. market will not be mirrored in the operation of non advised
sales. For non-advised sales, the cost can be too high and not
4.21 A sea-change is needed in the way consumers view their
immediately obvious. So theoretically, those customers who may
impending retirement and how it is financed. They need to be
opt for a seemingly lower priced service may actually end up
encouraged to move and amalgamate their smaller pension pots
paying more than had they had the benefit of full advice.
and to research both the annuity market and the type of advice
they receive, be it from their employer, a financial adviser or an 4.25 This is clearly not fair to consumers and we believe
insurance company. Only then will they be in a position to make safeguards should be put in place to ensure each customer
an informed choice about maximising their income in retirement. bears an appropriate, fair and transparent cost for the level of
advice they receive. Part of the solution will be to drive healthy
Proposal 3: Reducing the costs of switching
competition between annuity distributors, as much as between
providers
annuity providers.
4.22 When the FSA’s Retail Distribution Review is implemented
in 2012, the way customers access advice and guidance about 4.26 Non-advised annuity sales should therefore be subject
their annuity is likely to split into two broad sections. Firstly, to the same cost transparency rules as advised sales. Ensuring
consumers may take full financial advice and the RDR will charges are transparent and allow customers to understand the
require the adviser to agree upfront with the customer a clear, level of service they are buying will help empower consumers in
standalone fee for advice. shopping around and thereby drive down the cost of switching.

4.23 Alternatively, customers may use a non-advised purchase Proposal 4: Streamlining customers’
route to choose their annuities. This service will not be subject retirement savings
to the same adviser charge transparency regulations and may 4.27 As switching jobs every few years is now the norm for
continue to be charged on a commission basis. For many most, people are increasingly contributing to several private
customers with relatively straightforward needs who have pension schemes during their working lives. Aviva research
the confidence to act for themselves using guidance and suggests that one in three workers (30%) have five jobs
information provided by the Money Advice Service, FSA and throughout their lifetime.
providers, a non advised sale is entirely appropriate.
4.28 However, a worrying number of people are failing to
keep details of their different pension pots, which could
As switching jobs every few years ultimately affect their private pension income in retirement.
is now the norm for most, people And nearly two thirds (60%) are unaware they can combine
their private pension pots at retirement, potentially increasing
are increasingly contributing to their retirement income.
several private pension schemes
during their working lives.

12 Aviva Real Retirement Report


4.29 Aviva believes it should be as easy as possible for people 4.31 We therefore believe legislation should be introduced to
who have had a number of jobs to keep track of their pensions allow the automatic transfers of small auto-enrolled pension
and to combine them into one easy to manage pot. As well as pots, so savings pots follow members when they move jobs.
struggling to stay on top of a number of small funds, savers who For this to be a success, the pensions industry should work
have built up several smaller private pensions across their working together to develop a form of central clearing house to manage
life are often quoted worse annuity rates by their existing pension the transfer. This could make transfers easier by each pension it
providers, than they could receive from one combined pot. processes to the customer’s National Insurance number. We also
believe the restriction on transfers into and from NEST should
4.30 While the introduction of auto-enrolment in 2012 will help
be removed to facilitate this.
get millions more people saving, it’s also likely to make it even
harder for people to keep track of their funds – especially if they
switch jobs regularly and build up a few small pension pots after
being auto-enrolled into a variety of qualifying schemes.

Aviva believes it should be as easy


as possible for people who have
had a number of jobs to keep track
of their pensions and to combine
them into one easy to manage pot.

Aviva Real Retirement Report 13


Aviva’s proposals

Addressing customer needs


4.32 People who can access the level of information, support and 4.34 Aviva believes non-advised services may become more
guidance they need when they come to choose an annuity will be attractive when the rules to remove commission from products
far more likely to choose the type and level of annuity that suits bought through full advice from an independent financial adviser
them. But in many cases customers are not encouraged to seek an come into effect under the Retail Distribution Review in 2012. It is
alternative journey to the ‘default’ they are offered by the firm they good news that the costs of advice will become more transparent,
have been saving for a pension with. however, these measures may limit the numbers of people unable
or unwilling to seek advice.
Proposal 5: Helping customers choose an
appropriate level of guidance and advice
4.33 Aviva believes it should be as simple as possible for every
The financial services market
customer to choose the level of support they need when making would fail its customers if they
financial decisions about their retirement. Customers who feel are limited to either making their
confident and knowledgeable, and who may have relatively simple
retirement finances, may well be entirely happy purchasing an own choice with limited support,
annuity direct from a provider, over the phone or the internet, in or having to pay upfront for a
a non-advised setting. On the other hand, there may be many
vulnerable customers who are disconnected from the financial
full advice session
services industry, and need easy access to appropriate sources of
advice and information. In short, consumers should have confidence
in the level of support they receive, no matter which route they use
to manage their retirement finances.

14 Aviva Real Retirement Report


4.35 The financial services market would fail its customers if they are
limited to either making their own choice with limited support, or
having to pay upfront for a full advice session (particularly customers
with smaller levels of savings or income who may find the costs of
advice a deterrent.) Without some form of personalised support,
some customers may feel cut off and unable to make the right
choice for them.

4.36 A middle ground is therefore required, and following the Retail


Distribution Review, the proposed introduction of ‘simplified advice’
could be a great solution for many customers who, with the right
amount of guidance, would feel comfortable choosing the type
of annuity and provider that is right for them. However, for these
services to develop, the industry needs much greater regulatory
clarity. Challenges around the level of qualification the people helping
customers need to have remain - and we are asking that the ‘simplified
process’ itself is regulated, rather than the person delivering it.

4.37 We’ve seen that people are retiring with a greater number of
pension pots, a combination of final salary and defined contribution
pensions, and drawing on a range of assets such as investments,
and housing, and continuing to work to earn some income during
retirement. To make the most efficient and effective use of this
range of assets, some customers may wish to access advice that
addresses each area of a customer’s finances and talk to providers
and advisers that either advise on the full range of needs themselves
or refer to a specialist where they aren’t qualified. We suggest a
new form of adviser ‘badge’ is created and promoted to customers
so they know that if they talk to a ‘retirement adviser’ they will be
able to create a plan that addresses all their financial needs.

We suggest a new form of adviser


‘badge’ is created and promoted to
customers so they know that if they
talk to a ‘retirement adviser’ they
will be able to create a plan that
addresses all their financial needs

Aviva Real Retirement Report 15


Conclusion

5.1 The current retirement industry, while not broken, is no 5.5 We must make sure we are offering the best retirement
longer serving customers as well as it could. It was conceived in options for customers, and this means providing timely and easily
a different era, when people’s pensions were much simpler and understandable advice and information. This should help ensure
their life expectancy lower. that searching the market for the best annuity deal to suit their
personal circumstances will become second nature to a new
5.2 Wide sweeping social and economic factors are changing the generation of confident, astute consumers, just as it has with the
retirement landscape in the UK, with both working and saving purchase of car and home insurance. Customers need access to
patterns changing dramatically. retirement advice that not only matches their financial needs, but
5.3 Responding to these trends, the Government is introducing which also encompasses their lifestyle and longer term needs.
radical changes to the state pension system and retirement 5.6 To make these aspirations a reality, Aviva believes the
rules, such as the introduction of automatic pension enrolment industry must support the reform agenda the Government is
and NEST, removing the requirement for everybody to buy an progressing, by implementing the changes we have outlined to
annuity before they are 75, and publishing proposals to move to make retirement and annuities work for customers once more.
a simpler flat rate pension.

5.4 The retirement industry must play its part in rethinking


its retirement offerings and adapting them to the social and
economic changes ahead. Our customers face a very different
retirement to their predecessors and we must takes practical
steps to support them in this new landscape, to help our
customers achieve the prosperity and peace of mind that they
have saved all their lives for.

16 Aviva Real Retirement Report


Glossary

What is an annuity? What is a defined benefit pension scheme?


6.1 An annuity is a retirement income plan, which is designed 6.5 A defined benefit pension scheme is one that offers a
to provide an income for the rest of your life, no matter how retirement income which is directly based on your final salary
long you live. You buy an annuity using a lump sum from your when you retire or leave the company, and your length of service.
pension or, perhaps, some savings
What is a defined contribution pension scheme?
Annuities are only available from insurance companies. 6.6 With a Defined Contribution pension scheme (also known
as money purchase), the benefits are not known until they are
What is the Open Market Option?
taken. Contributions are paid to the scheme and invested in
6.2 An individual can choose who to buy their annuity from the chosen investment funds and the value of the fund when
- it doesn’t have to be with the insurance company that they the member takes their benefits will be used to provide their
used to build up their pension fund. The amount of income pension benefits, usually by buying an annuity.
an individual could receive from an annuity will vary between
different insurance companies, so it’s a good idea to do some What is automatic enrolment?
comparisons before making a decision. 6.7 In October 2012, new employer duties are planned to come
into force, which will require employers to enrol eligible workers
What is “Tax free cash”?
into a qualifying workplace pension arrangement. While
6.3 An individual can normally choose to take up to 25% of individuals will have the right to opt out, those remaining in the
their pension fund as a tax-free cash lump sum. This may be scheme will have to make contributions which will gradually be
paid either by the pension provider or by the annuity provider, phased up to 4% of their qualifying earnings. Employers will
depending on an annuity is purchased. be required to contribute 3%, and the government will add
What is a pension? another 1% in tax relief.

6.4 A personal pension is a long-term investment that aims to


help an individual build up a pot of money that they can use to
buy an income when they retire.

It’s a tax efficient way to invest for retirement because


HM Revenue & Customs (HMRC) adds tax relief to the
payments made into a plan.

Aviva Real Retirement Report 17


Aviva also produces a series of reports looking at
Retirement and Prosperity in the UK and across Europe.

The Real retirement report


Quarterly insight into the attitudes of UK retirees and pre retirees

Mind the Gap


Regular insight into retirement funding across Europe

Family Finances Report


Developing a picture of UK family types and their approach
to finances

Future Prosperity Panel


Working with the Economic Intelligence Unit and leaning
thinkers to better understand the financial issues
affecting customers

These reports are available on www.aviva.com/media


Aviva Life Services UK Limited. Registered in England No 2403746. 2 Rougier Street, York, YO90 1UU.
Aviva Life Services UK Limited is authorised and regulated by the Financial Services Authority.
www.aviva.co.uk

30854 05/2011 © Aviva plc