SIKI MGABADELI: In our retirement feature today we are focusing on savings – how to preserve them for retirement. I am in conversation with Mark Lapedus, who is divisional director for proposition enablement with Liberty Innovation.
Mark, thanks so much for your time today. What on earth is “proposition enablement”? As I read that, I thought I’d never heard of it.
MARK LAPEDUS: It’s really about the propositions that we offer to our customers and how we can make them customer-centric. Really, it’s the old term for product development. But as we move more into being customer-centric, it’s less about products and more about propositions that we offer to our customers.
SIKI MGABADELI: Today we are focusing on savings. I suppose here it really is about individual behaviour and how we make decisions.
MARK LAPEDUS: Absolutely. Saving is something that people need to do for the future, but in our current age of instant gratification it’s something that people don’t really want to do. We want to consume money now, spend now, and think the future will take care of itself. But the reality is that, in order to save for our futures we need to act now, make decisions now that will enable us to have a safe and secure retirement and just a good future.
SIKI MGABADELI: So how do we light that switch in people?
MARK LAPEDUS: It’s all about educating people and encouraging them to start saving as early as possible. Too often we have people, when they get their first job, they think, well, I’ll worry about saving for my retirement later. Let me enjoy spending my money now. And later becomes even later and even later and, the next thing you know, that person is five years out from retirement and all of a sudden needs to start making provisions and plans for how they are going to plan for that retirement.
SIKI MGABADELI: I suppose now also, where we are no longer in that culture of staying in a job until retirement age, you get your golden watch and your retirement package and you go off into the sunset. People change jobs quite often and often they dip into their retirement savings as well.
MARK LAPEDUS: Absolutely. And so not only is it really important to start saving for your retirement as early as possible, but then, as we do change jobs, it’s really to be disciplined and not to go and, as you said, dip into that retirement savings, go out splash on a new car or a new house, but to keep preserving that money and to keep accumulating it up until retirement/ That, at the end of the day, was the purpose of that money. It was there to save for your retirement. But if we keep changing jobs every couple of years and we spend that money, even though we may have been disciplined in actually saving it, it never fulfils its purpose in terms of lasting into retirement.
SIKI MGABADELI: There are so many savings vehicles these days that it can get quite confusing. What sort of trends are you seeing in terms of where people are, the types of products that they are using to save?
MARK LAPEDUS: I think when you come to retirement savings, very often people first and foremost use their company’s retirement funds. But the mistake there is that they often think that if I’ve just got a company retirement fund, that’s sufficient and “I’m sorted”. It really is important to say: Well, is that enough? Am I putting away enough and am I going to get to a position where I have accumulated enough?
If not, let me look at other vehicles that are available. That might be a retirement annuity or any other savings vehicles. The advantage of retirement annuities and the like is that they offer a lot of tax advantages which give incentives to people to save for retirement, and help that growth not be subject to tax between the time that you start saving and your retirement date.
SIKI MGABADELI: Once you are retired, you might find that you are quite sprightly and you could live another 20, 30, 40 years in some cases, where people haven’t fully planned for that. So what are retirees doing?
MARK LAPEDUS: I think more and more people are delaying retirement ages, continuing to work longer than they originally planned because, as you say, they are still fit and sprightly, and also because they haven’t made enough financial provision to be able to live for the next 30 or 40 years in their retirement. And so we do see more people continuing to work past their original retirement age, But, the better people plan in advance for retirement, the more likely it is that they can actually enjoy their retirement not having to actually work.
SIKI MGABADELI: I understand that many people are starting to look at living annuities more and more. Why is that?
MARK LAPEDUS: Living annuities offer many advantages to clients. But I think one of the big reasons why people do choose a living annuity is really that is it allows you to keep your retirement savings, and you select how you would like to invest it. And each year you draw between 2.5 and 17.5% of that as an income.
The reason why people like living annuities is that, if they haven’t saved enough, by simply increasing that percentage, the starting income that they can get can help them sustain the lifestyle that they’ve become accustomed to. While that may really help them in year one and two, the problem with that is, if they are not earning enough on the underlying investments, then very quickly they start to deplete that retirement savings and within three or four or five years they have run out of their retirement savings.
So that’s really a consequence of the fact that they did not save enough throughout their lifetimes.
SIKI MGABADELI: So how do you grow that capital while living off it at the same time?
MARK LAPEDUS: The first thing to do is to start saving earlier. But if you haven’t done that and you are now in a position where you need to draw, let’s say, 7% out of your retirement savings, what people then say is: I’m drawing quite a high percentage. The last thing I can afford to have is to lose money on my portfolio.
So what they then do is they choose a very conservative investment portfolio for their underlying investments. And of course that’s the worst thing that they can do because, if they are now invested in conservative portfolios, drawing a high percentage, they are really just going to speed up the time to deplete their capital.
So what they really need is the ability to take on an opportunity to earn the highest possible returns. Now, we know that in order to have the opportunity of earning high returns it generally means that we need to take on higher risk. And taking on higher risk isn’t something that people like to do.
What Liberty have done now with our new living annuity product that we’ve just launched, the Liberty Bold Living Annuity, is to enable clients to have a guarantee that effectively protects them against the adverse consequences of a market downturn while at the same time allowing them to invest more aggressively to hopefully try and improve their chances of having their capital last as long as possible.
SIKI MGABADELI: How does the guarantee work?
MARK LAPEDUS: Importantly what it does is that it still allows the investor a choice of any portfolio from a range of 200 different portfolios, so we are not prescriptive on how they go and invest it, into which portfolio. They can switch those portfolios at any time that they like. And all that we do is we put a guarantee effectively on their returns.
It’s what we call an 80% high watermark guarantee. What that means is that as performance increases, so too does the level of the guarantee. So every single quarter we look at the level of performance and we keep increasing that guarantee if markets have performed.
But if markets take a downturn, and they fall by more than 20% from that previous high, then the client is protected at that level and won’t lose any more money beyond that particular point.
SIKI MGABADELI: And what does it cost?
MARK LAPEDUS: The costs of it are really very, very reasonable. The client will pay 1% up front, which will last for a five-year guarantee period. And thereafter the client will only have to pay anything in addition to that if the returns on their particular portfolio exceed 14% in any year of that five-year period. What they’ll effectively pay then is 20% of that outperformance. So really what they are doing is they are only paying when their growth is very good, above 14% per annum.
If growth happens to be poor and the guarantee kicks in, then they are not actually paying anything for the guarantee in that particular year.
SIKI MGABADELI: And after five years you can just renew?
MARK LAPEDUS: After five years you just renew that guarantee. There are other guarantees that, while not similar in terms of the way they work, do offer high-watermark single funds, and their costs are typically anywhere up to 3.5% per annum. So the cost of this [one] is significantly cheaper for the client.
SIKI MGABADELI: We’ll leave it there. Thanks for your time today, Mark Lapedus, who is with Liberty Innovation.