Saving for retirement – so what’s to smile about? Blog 2


Saving for retirement – so what’s to smile about?

In my first blog of this series I talked about how saving for retirement was tough given the huge expenses we all run up. However alls well that ends well ….and if you do put away more now then the bigger your retirement smile will be (or indeed the smile of your members if you are a trustee of a DC scheme).

Last time we looked at how the three phases of your (your DC members) required income during retirement created “your smile”. First stage – healthy and expensive. The second stage – “cheaper sedentary phase”. The third and final stage – less mobile and expensive due to the potential cost of care.


Prior to the introduction of the government’s “new freedom and choice agenda” the lack of flexibilty meant that there was a huge mismatch in terms of the required income during retirement and the actual income received particularly in the first and final stages of retirement.

The 25% cash lump sum would need to be sensibly managed over the first few years so that it would last until the level annuity was enough to meet the expenditure requirements as phase two – kicked in. In the latter years this annuity would be insufficient to keep pace with the increasing income requirements of the “final phase”.

The new era of freedom and choice in pensions brings with it increased complexity in terms of the decisions an individual DC member will have to make. This is a direct result of the increase in options that will be available and the likelihood of new and complex products flooding the market. Prior to all of this the only real decision a DC member approaching retirement had to make was when to take out an annuity.

The same applies to those of you who are trustees of a DC scheme. Previously the options you needed to offer your members were relatively simple. Now the game has changed. Even the new design of a default option is potentially more complicated…do you include a completely flexible drawdown option for your members?

So how do you get your head around all this increased flexibility and complexity? And indeed how can you, as a DC trustee, use this to benefit your members going forward by offering them better quality and more flexible options?

In order to try and visualise these options I’m going to use the graphic below:

As you move from left to right on the graphic the investment risk of the underlying investment funds increases from a lower risk Diversified Growth Fund (DGF) to a progressively more risky DGF. As you move up the table the individuals’ options for accessing their funds at retirement change from cash to annuity to draw down. Any one of these options or indeed all three may be chosen if available.

As a DC trustee you can use this graphic to explain to your members where their default currently stands and what it is set up to achieve as it stands today. Currently most default options for DC trust based schemes sit in the medium risk category in the two orange boxes. The end game set up by most DC trustees for their scheme members is a combination of cash and an annuity.

Draw-down has been a viable option for a trust based DC scheme for a number of years already. However due to the administration complexities and systems updates required, DC trustees have largely been unable to offer this option thus far.

Going forward the options have increased. With the now completely flexible draw-down of your 25% tax free lump sum, it is likely that the mismatch of required income in retirement and the actual income received can be overcome. Previously your 25% tax free cash lump sum had to be taken out in one go immediately on retirement. Now, as can be seen from the chart above, the orange columns the tax free lump sum can be spread over the first few active years in phase one of “healthy but expensive”.

Given that legislation changes now mean there will be complete freedom to draw down your income as and when you need it,  the green columns can now match the required income.

Lastly given that the government is now allowing annuities to be structured with reducing cash streams, this offers insurers and specialist annuity providers increased scope to develop more innovative products to meet the complex requirements of retirees. I believe tailored annuities will pop up…for example deferred annuities…or simply purchasing an annuity when you’re older so it is cheaper and provides you with some sort of guaranteed income for life.

In the third and last of this blog series I will tackle the question – so what are the changes being introduced from April 6th and how could they affect you as a DC saver?

Sital Cheema-Associate Director, Client Strategy & Research EMEA


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