The Retirement Wave

Unlike other theories, the “Wave” shows how the change from work to retirement is increasingly not a single, one-way event. It’s become a much more flexible journey, which has implications for how retirement income needs to be planned.

The Retirement Wave

As life expectancy increases people are moving between work, retirement and back into work again. This trend is primarily driven by increased life expectancy, as people live longer they expect to have a longer retirement too. With UK males expected to live on average for another 29 years from when they can potentially first access their pension benefits, and for females its 32 years.*

However, many overlook the fact they may need to work longer to support the financial cost of these extra years. Whether that is staying longer in a full-time job, reducing their hours or taking a part time role. It’s clear, for those approaching the age that they can access their pension benefits, the rise of a less fixed retirement journey has several important implications.

Between accessing pension benefits at 55 and average life expectancy.*

The need for ongoing support

The move back and forth between working life, retirement and potentially work again means income needs can vary considerably over the course of a person’s life. This increased complexity makes it vital that people seek out advice to help them make appropriate plans for the years ahead.

With the need for different income levels becoming less clean cut, there is a greater need for advisers to have a regular, ongoing relationship with clients. Once the initial advice has been provided and plans are put in place, a regular review becomes essential. Ensuring a client’s income continues to best match the reality of their changing retirement lifestyle and expenditure requirements, by helping clients negate investment and mortality risk.

Suitability of client income withdrawals is often done via cashflow modelling. The regulator has made it clear, in the 2024 retirement income thematic review, that it sees this as an area for improvement. Highlighting that the industry needs to take a more constant approach.

As clients age, their ability to make sound financial decisions can decrease significantly throughout their retirement. Clients are therefore likely to need more support from family and/or power of attorney in adviser client meetings. As well as advice on financial planning, they will also likely benefit from help with issues such as estate planning, or how to fund long-term care.

Finally, the upcoming inheritance tax changes may lead to more pensions being accessed earlier. This suggests more opportunities for firms to show the value of their advice, but also a need to find ways to deal with the potential for increased activity and client demand.

Flexibility and choice are key

Two of the main priorities for Defined Contribution pension clients are flexibility and access, which is why Drawdown continues to be the solution of choice for retirement income. With the number of pension pots moved into drawdown increasing by 27.9% from 218,183 in tax year 2022/23 to 278,977 in 2023/24.**

278,977 Pension Pots moved into Drawdown (2023/24 Tax Year)**

Many clients moving into drawdown still decide to take all their available tax-free cash at once. However, with increased demands for flexibility, and seeking out the optimal set of options, it may not be the best decision. Phased withdrawals (combining small, regular amounts of tax-free cash and taxable income) could better meet income needs and be more tax efficient. It may potentially also increase how long clients’ money could last, which is especially important during periods where retirement income needs are lower due to either going part-time or returning to work.

Automated functionality such as drip-feed drawdown can help save firms’ time when servicing clients’ income needs. Especially within the context of the growing demand for regular retirement income from an aging population, most likely to be in a DC pension. This is highlighted by 527,546 pensions plans having set up regular withdrawals in 2023/24 (47% increase from 5 years prior). As mentioned, the upcoming IHT changes may lead to even more demand in future, as pensions return to being used more to fund a retirement rather than as a primary estate planning vehicle.

The need for certainty

Nobody can predict volatility, and it’s a normal part of investing. Although it cannot be predicted, it is possible to reduce the impact for clients in retirement. This is why the security of income during retirement is still an important consideration, with many looking for a middle ground between the flexibility and access offered by drawdown, and the certainty of an annuity.

An annuity can be an attractive solution, providing a guaranteed income for life. This guaranteed income provides peace of mind but can’t be altered to adapt to changing circumstances. For example, you can add a dependant’s pension to an annuity to provide a guaranteed income to your dependant when you die. However, this needs to be chosen before buying and can’t be added once the annuity has started.

On the other hand, Flexi-access drawdown can allow better for changing or unexpected income needs. Enabling clients to access their pension savings as and when needed, and funds can remain invested providing the possibility of further growth. This option needs to be managed carefully to ensure clients do not run out of income during retirement. With any investment strategy balancing exposure to growth assets whilst being able to limit the impact of potentially damaging market volatility.

Taking a blended approach

It might be that taking a blended solution and utilising annuity and flexible access drawdown can mitigate some of the risk associated with each product. With an annuity being used to cover a client’s essentially needs in a safety-first approach that focuses on their capacity for loss. Once essential expenditure has been covered, consideration can turn to more flexible solutions involving more investment risk.

It’s clear the changing pattern of retirement shown by the retirement wave poses both issues and opportunities for retirement planning. Adaptable and flexible products can go some way to help meet the changing needs and circumstances of clients in retirement.

How Scottish Widows can support you in meeting your clients’ changing retirement needs

Whatever your clients’ circumstances, we are well placed to help you deliver a sustainable retirement income. Whether that is through providing the income flexibility of drawdown, the guaranteed income of an annuity, or a combination of both. We’re one of only a few providers that can offer the full range of retirement income options.

Customer needs	Annuity	Flexible access drawdown	Annuity and Flexible access drawdown***
Would prefer income flexibility	No	Yes	Yes
Would prefer a guaranteed income for life	Yes	No	Yes
Would like to keep pension fund invested to allow the potential for further growth	No	Yes	Yes
Would like the option to pass on any unused pension funds on their death – to their beneficiary/beneficiaries.	No	Yes	Yes

* Office of National Statistics Life expectancy Calculator
**Financial Conduct Authority, Retirement Income Market Data
***Taking a blended solution of annuity and flexible access drawdown can mitigate some of the risk associated with each product, however as each product is separate the risks aren’t fully mitigated.