People retiring after April 1 in the United Kingdom will have the freedom to do whatever they like with the money from their various pension plans. This FT Adviser article by Milliman’s Colette Dunn and Russell Ward offers perspective on the effect reform will have on an individual’s risk and also on the impact on defined contribution pension schemes.
Here is an excerpt:
To reflect changing retirement patterns and provision, DC schemes need to offer flexibility. Individuals want the flexibility to postpone retirement and/or phase pension income, to align with continued participation in work. These are two fundamental ways for individuals to manage the risk that pension income will be less than they require. Flexibility to integrate the Nest pension with other pensions so that the total pension income is level could also be beneficial. Individuals also want to have their money when they need it. In other words, they require flexibility in terms of sequencing. For example, individuals may want a lump sum when they retire to update their house, buy a new car or go on holiday. They may also need an increased income towards the end of their retirement if they need to fund care costs.
It is clear that the next generation of products need to enable ongoing advice. As the circumstances of the retiring individual evolve, their retirement solution must have the ability to adapt, so that they can respond dynamically to changing needs.
Given an individual’s need for certainty in retirement, we expect guarantees to remain in demand for at least part of their solution.
…The new environment provides an opportunity for advisers to help individuals throughout their retirement, and for providers to offer solutions which recognise the changing needs and regulatory environment. This will enable individuals to make better choices which provide improved risk-adjusted returns on their retirement savings and deliver a better overall chance of meeting their goals. The tools and techniques required to deliver these solutions are available now.