When picturing the perfect retirement there are an infinite set of scenarios with some of us looking forward to a simple life pottering in the garden with the grandkids, while others envisage wild World trips and second homes in sunnier climes!
Pension Freedoms opened up a world of opportunity for clients entering retirement but it also put extra pressure on the advice process. With options comes complexity, and with complexity comes risk.
Despite these very different visions, the underlying concern remains the same for most retirees – nobody wants to run out of money! In fact, most of us also harbour the desire to help our loved ones meet their goals, such as getting their foot on the property ladder, paying for education or simply knowing that we can leave a legacy when the time comes.
Pension Freedoms opened up a world of opportunity for clients entering retirement but it also put extra pressure on the advice process. With options comes complexity, and with complexity comes risk. So how does an Adviser guide their client through the maze of options now available whilst ensuring they protect both themselves and the client?
The FCA's Data Bulletin March 2018 showed that clients are taking varied approaches to accessing their retirement savings, with 55% of accessed pots being full withdrawals, 30% income drawdown and 12% annuity.
Where once only a binary choice was available – Income Guarantees (such as DBs) or Pension Freedoms, there are now a multiplicity of options that allow for change over time and for the balance of preservation and longevity to shift as the client's needs change. All of this requires ongoing review to ensure that the approach you advised last year is still valid now. With the FCA recommending that all drawdown clients require regular reviews, at least annually, covering advice on complex accumulation and decumulation strategies, it is important to consider the factors that must be covered as a minimum. These include changes in legislation as well as for the client's age, circumstances, tax status, health, capacity for loss and attitude to risk. Indeed, the PFS Best Practice Guide builds on this and asks the critical question;
'How do you decide if the time has come to consider a partial, phased or full exit from a drawdown plan (for example, to buy an annuity when a client gets older and the impact of mortality drag means their drawdown strategy becomes progressively less effective)?'
Clearly Advisers need to protect their clients and themselves, from the risk of clients running out of money before they die and ensuring that their clients are offered the opportunity to secure a guaranteed income is essential.
Capacity for loss
The FCA defines 'capacity for loss' as the customer's ability to absorb falls in the value of their investment. If any loss of capital would have a materially detrimental effect on their standard of living, this should be taken into account in assessing the risk that they are able to take.
According to the FCA's Data Bulletin fro m March 2018, only 46% of consumers who made a retirement income decision in the last two years actually considered their health or life expectancy. Without taking these factors into account it's impossible to ensure that clients are investing to cover their essential spend.
Covering essential spend
On reaching full retirement, clients generally have their state pension plus a finite pot of money to see them, and possibly their spouse, through their retirement years and this could be a long period. While it's great news that people are living longer, it does present a financial challenge. A 65-year-old man now has a 50% chance of living until the age of 87 and a 65-year-old woman to the age of 90. So ensuring there is enough income to last throughout retirement is key.
The ability to keep adding to that secure pot can also be crucial as health fails or the ability to make complex financial decisions reduces with age. Nobody wants to be scrimping and saving in their retirement to protect the longevity of their income.
It has been easy to see in countries such as Australia, where pension freedoms have been part of the retirement landscape for far longer than in the UK, that the desire to maintain control over ones' retirement savings rather than locking it into an annuity can mean living a far more frugal existence than necessary. Clients not wanting to hand over their entire pension pot (Super Annuation) into secure guaranteed income, will often live in the fear of running out of money in retirement. It requires confidence to make the jump from a reliance on human capital to a reliance on investment capital.
For retirees in the UK there remain various options to enable a pension pot to be split between an annuity and other more flexible options as within a SIPP, but a single provider offering these along with open architecture flexibility has proved elusive.
Research by PwC Research commissioned by Just in 2017, shows that ensuring some secure income is by far the most desired route for all groups surveyed.
Securing an income to cover essential spend without sacrificing flexibility
With people living longer in retirement it is likely their needs will change over time. So the challenge for Advisers is to deliver a solution that balances longevity with flexibility. The answer seems to be obvious: combine the security of guaranteed income with the flexibility of a SIPP – ideally all in one place with open architecture allowing a wide range of investment options.
Using the Novia SIPP you can now offer both, on the one hand, a medically underwritten secure lifetime income complete with 100% FSCS guarantee to cover the essentials plus, on the other, the flexibility to invest in a wide range of asset types to cover the discretionary spend and potentially grow the portfolio. Holding the Guaranteed Income as an asset of the SIPP retains all of the IHT and income tax benefits of a SIPP with the added flexibility of choosing when to draw the income. Providing all of this in one place makes it possible to deliver the secure income underpin (which also provides a death benefit and cash-value in the early years) whilst the wider portfolio can be tailored to suit your client's changing needs in retirement. In fact, if they choose to de-risk their portfolio further over time they can simply purchase more Guaranteed Income.
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