How have the 2015 pension reforms affected the traditional phases of retirement?
The pension reform in 2015 changed a lot of things for us. We are now expected to make active decisions. The retirement date is no longer a step change now, and being able to access our pension savings as early as age 55 has given us a lot of flexibility and responsibility and choices, and because of that the FCA are giving us four possible pathways.
Can you tell us about the four default retirement pathways the FCA has proposed drawdown suppliers should offer?
FCA are recommending four pathways so that retirees can make informed decisions. One possible pathway is to leave it as it is, invested, and you are not going to touch it for the next five years or so. The second possible way is to redeem everything and use it for some other plans you have in mind. The third possible way is to buy an annuity in the form of guaranteed income, but last but not least, you can still set up an income drawdown strategy that is unfortunately not guaranteed.
How could these default pathways influence the design of default strategies?
In designing different strategies what is most important is to factor in all these different options early on. Now for instance, if we are designing a different strategy that is to be redeemed in a short period of time, we want to have it liquid and flexible. This way we are avoiding reinvestment risk or redemption risk. Now, on the other hand, if this default strategy is to be used to purchase an income strategy, then we want to make it as flexible as possible but well diversified across different asset classes.
Multi-asset solutions manager Joo Hee Lee considers how the FCA’s proposed retirement pathways could influence default strategy design
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