View more on these topics

Platforum: The insidious retirement planning risks ahead for advisers

The factors that scared off DB pensions and suppressed annuity rates are still around. Will advisers feel the backlash when risks are more apparent?

Recent developments in pensions have accelerated the transfer of risk away from employers and institutions, and on to individuals. But the chances are that advisers will still get some of the blame when things go badly wrong and clients run out of money in their old age.

First, there was the great switch from defined benefit to defined contribution pensions. Economies of scale, intergenerational cross-subsidies and risk-pooling enabled these schemes to keep costs down and smooth out ups and downs.

But in the end, it was the employer that picked up the tab if things went wrong. Ultimately, that risk became too much of a burden.

Changes to accounting standards meant employers were forced to recognise the true liabilities they held on their balance sheets, while their pension liabilities rose as rules for running schemes were tightened. Trustees were no longer allowed to make quite such optimistic assumptions about future investment returns.

Meanwhile, longevity increased inexorably at the rate of about two years every decade. Little wonder the world went largely DC.

The next big development was pension freedoms. While people can now make use of increased flexibility, freedoms have led to the near-death of annuities.

Individuals have the freedom to manage – or mismanage – their own retirement income, instead of insurance companies taking the investment and longevity bet when they retired. Annuities had become very unpopular, with yields more than halving in the wake of declining interest rates and rising longevity.

Unsurprisingly, advisers have embraced pension freedoms and are now closely associated with their promotion and management.

For most clients, who tend to be at the more prosperous end of society, freedoms have a lot going for them: the ability to lock into equity rather than fixed-interest returns, flexibility to draw down when money is needed and leave it invested when it is not, inheritance tax advantages and potential death benefits generally. But we all know DC pension saving followed by income drawdown has its risks.

The two factors that scared off DB pensions and suppressed annuity rates – longevity and interest rates – are still there.

The question is whether advisers will feel the backlash when the risks become that much more apparent.

With some of the risks, the blame falls squarely on the individual investor. Buy a Maserati with your pension pot and do not be surprised when depreciation leaves you with a much-depleted lump sum after very few years.

The real risks to advisers are likely to be more gradual and insidious. Over-optimistic forecasts of returns, pound cost ravaging, sequencing risk, long-term underperformance of equity markets, high charges, inflation, longevity and long-term care needs can all contribute to someone running out of money.

Many clients suffering the fallout will place the blame at advisers’ doors. The fact is some people are almost bound to run out of money before they die. Even if an adviser’s stochastic modelling forecasts 95 per cent success, at least one or two clients will probably outlive their money. And this might happen soon. Fortunately, there are some sensible strategies advisers can employ:

  • Managing expectations is crucial, as most advisers are keenly aware. Do not overpromise; make sure clients are aware that stuff happens and the future is a very hard thing to predict;
  • Use tools like cashflow modelling to envisage multiple scenarios – not just a single possible outcome that looks like a firm prediction. Help clients monitor their expenditure and keep it in line with their resources;
  • Watch out for new products in the pipeline that could help de-risk some portfolios with flexible annuities, long-term care insurance and possibly equity release. De-risking clients’ portfolios also serves to de-risk advisers’ businesses.

Richard Bradley is associate research director at Platforum. Platforum will shortly be running adviser roundtables discussing retirement propositions. Any advisers interested in attending can contact Mariam Pourshoushtari at mariam.pourshoushtari@platforum.co.uk

Recommended

7

Paul Armson: Why you should never charge for managing money

Why create a service proposition that depends on what you can’t control – the performance of money? There has been a recurring theme in my conversations with advisers over the past few months. When I ask the simple question, “what’s your most worrying challenge right now?” I am getting the same answer: that fee discussions […]

Tapering of annual allowance – adjusted and threshold income

The definitions of adjusted income and threshold income used to determine whether, and to what extent, someone’s annual allowance will be reduced can be confusing.  Here we try to make sense of it all. The annual allowance will be reduced for high income individuals from 6 April 2016.  Our previous article Tapering of annual allowance […]

Budget-2018-Chancellor-Philip-Hammond
3

Budget 2018: Lifetime allowance nudges up as Hammond bucks pension tax reform rumours

The lifetime allowance for pension savings will increase slightly more than expected next year to £1,055,000, according to Budget documents published today. Initially the lifetime allowance was meant to increase in line with September’s figures for the Consumer Price Index to £1,054,800. But the government has rounded up the lifetime allowance slightly more than originally expected. […]

Martin Greenwood Tenet 700.jpg

Tenet signs five-year contract with Intelliflo

National network Tenet Group has signed an initial five-year contract with back office provider Intelliflo for the provision of Intelligent Office. The Intelligent Office back office system is introduced eight years after the network developed Tenet Advantage, a front end and back office system, with Focus Solutions. It was classed at the time as a […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. “De-risking clients’ portfolios also serves to de-risk advisers’ businesses.”

    That’s the most sensible thing I’ve read in the trade press for a very long while. Listen and learn – don’t give clients what they want, give them what they need.

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com