Tag Archives: Chris Lewis

UK reforms opens a secondhand annuity market

Individuals in the United Kingdom will be allowed to sell their annuities starting in April 2017. A few important questions arise in light of this development: Is a secondhand annuity market sustainable? Who needs to participate in the market to sustain it? Is such a market appealing to consumers? A recent FT Adviser article written by Milliman consultants Colette Dunn and Chris Lewis explores these issue.

Here is an excerpt:

As the Chancellor stated “For the vast majority of people, continuing with their existing annuity will be the right choice.” This is a view that has been strongly reiterated by the Economic Secretary to the Treasury, Harriett Baldwin, and by Minister of State for Pensions, Baroness Altmann.

However, without doubt there will be demand from some consumers. Some will simply be tempted by the short term cash over an income for life. Others may have bought an annuity when they were required to have a £20k income per year to enter flexible drawdown (a rule which no longer applies) and now wish to sell it.

Anyone who plans to sell their annuity, should consider more than just the price. They need to think about the tax implications, the potential loss of means tested benefits and whether it will result in them paying more towards any care costs.

The price is important too! Although we cannot know how the market pricing will develop, we have calculated illustrative cash-in values based on current interest rates, an assumption of current good health and possible transaction charges.

UK pension reform reading list

The UK’s retirement landscape has changed significantly. Pension reform now provides retirees with broader access to their retirement savings. However, reform has also shifted more post-retirement risk to the individual. This reading list highlights some of the issues at hand.

“Blended retirement solutions” (subscription required)
Individuals need financial plans that offer income solutions and address key retirement risks. This FT Adviser article  highlights a retirement framework development by Milliman and AXA Wealth that help advisers assess their clients’ needs based on a well-known psychological theory. The framework is detailed in a report entitled “Retirement planning: Bespoke retirement solutions are ‘the new black’ in 2015” by Milliman consultants Colette Dunn, Chris Lewis, and Emma Hutchinson.

One model which can be used to determine at-retirement choices in the context of these risks was set out by management consultancy Milliman along with Axa Wealth. It is based on US psychologist Abraham Maslow’s famous ‘Hierarchy of Needs’, which placed people’s innate requirements in order of priority to ensure psychological health. Axa Wealth transposed this hierarchy on to retirement spending ‘priorities’, to differentiate between essential and more discretionary costs.

In the retirement hierarchy, the money set aside to feed oneself, pay for a roof over your head and meet essential bills is defined as ‘essential’. Income to meet these needs would be subject to a very low attitude to risk.

More ‘discretionary’ spending, which could include everything from running a car to holidays, is less set in stone and so open to greater risk. Often objectives here might require significant investment growth to be fully realised.

The more important given needs are considered, the less risk your client will be willing to take. This could result in possibly several layers of risk needing to be met.

A final element is ‘legacy’, or the wealth your client may wish to pass on when they die. This is classified as the most aspirational of the needs and thus subject to the highest risk.

Once ranked, these income requirements can be placed into a framework.

• “Actuaries warn of retirement cash running out
Many experts believe retirees run a higher risk of depleting their retirement incomes, which is due to pension freedoms. Colette Dunn comments on results from a survey of industry experts at Milliman’s Forum.

• “Calculating pension income
Advisers need to develop new approaches to help their clients manage new retirement risks. Milliman’s Dunn and Russell Ward discuss solutions that address market risk and inflation risk.

• “A retirement planning model for the new pensions world
In this article, Dunn and Chris Lewis highlight a retirement framework that advisers can employ to match a retiree’s income needs to specific levels of risk.

• “Reform spells healthy future for advice
Reform offers advisers and providers an opportunity to innovative solutions that may help participants navigate the new retirement environment. Milliman’s Dunn and Ward provide their perspectives.

• “Blurred lines of retirement saving
In this article, Dunn highlights important conversations advisers need to have with people at different stages of their retirement planning.

UK retirement planning model is more than a drop in the bucket

Pension reform in the United Kingdom has given individuals more access to their retirement money. As a result, post-retirement risk has also been shifted to the individual. This development is providing financial service professionals the opportunity to create new retirement planning models.

In this FT Adviser article, co-authors Colette Dunn and Chris Lewis offer perspective on a retirement framework that matches a retiree’s income needs to specific levels of risk. Here is an excerpt:

Using a bucket approach to discuss expected spending requirements throughout retirement can make it easier for individuals to understand their needs, their varying attitudes toward risk, and the necessary trade-offs. This approach can also be used by advisers to build a bespoke portfolio solution for a client…

The bucketing approach can be thought of as a ‘bottom up’ approach to determining the retirement solution, which is intuitive and easy to explain to clients. In addition, sophisticated modelling tools are available which an adviser can use to validate and/or fine-tune the overall asset allocation within and between buckets – that is, taking a ‘top down’ or diversified portfolio level approach.

Benefits of the framework
The framework can be used by advisers as part of the retirement planning process, and can be tailored to individual circumstances, taking into account both financial and emotional needs. It meets the three previously identified benefits, namely:

• Simplifying a complex retirement into a structured approach,

• Ensuring that an appropriate level of risk is taken for each prioritised retirement need, and that the overall level of risk for the portfolio is appropriate for the individual, and

• By segmenting into buckets, and thereby providing a higher level of certainty in the short to medium term, it provides individuals with peace of mind and helps to avoid the potential for overreaction to market shocks.