Retirement advice is low value, fraught with problems and the end of the client relationship.
This is an argument I have heard many times but, in my view, nothing could be further from the truth. For advi sers prepared to operate in this market, this can be a highly satisfying and profit able area of business. Con sider these facts:
Last year, £7bn of pension money was converted to annuities (ABI statistics) for half a million clients.
Evergreen estimates that only one in four people exercise the open-market option. This means advice is required for 75 per cent or £5.25bn of purchase money, equating to over 300,000 potential clients.
Clients at retirement have no choice – they must convert their pension fund to income. A sale will be made.
Tax-free cash totals over £1bn and needs expertise to gen er ate the most efficient income.
Most retirement inc ome will be hit by inflation. In their 70s, clients need more inc ome.
Retired people account for £200bn of property.
Equity-release sales are no more than £300m.
People are living longer but qual ity of life is not improving. Long-term care is a major issue for the retired population.
Convinced that the retired population need good independent advice? Read on.
When a client reaches ret irement, they will have accum ulated capital sums in pen sion schemes, Isas, building society acc ounts, their home and so on. It is the job of the adv iser at retirement to ensure these sums are invested in a way that will ensure the client has adequate income to meet act ual and desired expenditure in retirement.
To achieve this, a know ledge of tax and investment is required. It is necessary to build a client's net spen dable income by using all the tax planning tools available including the spouse's personal allow ance, Isa income and so on.
The conversion of pension money requires a good know ledge of the areas of pension legislation as well as income fund withdra wal. A client will need to be coun sel led as to the risks involved in each area and the route the client feels most comfortable with will be the solution. I find it ironic that a h
igher level of knowledge is required at this stage of a person's life than at the outset.
This may sound like a lot of work and it is. Remember that the client has no choices – he must convert his funds to inc ome so your efforts will be rew arded if you show exp ertise.
A word of warning, however. This is a highly complex area and you are dealing with clients who are worldly wise yet vulnerable, who are looking for ward to retirement but are unc ertain. They need time but your time will be rew ar ded.
A further word of caution is necessary when selecting pro ducts to recommend. I find it unacceptable in the 21st Cen tury that life companies can still operate with-profits annuities on a hidden charge basis. Even worse, they do not guarantee they will bear the cost of future mortality improvements, meaning this could be a cost borne by the bonus pool of with-pro fits policyholders. I wonder if this is why offices which do not compete in the non-profit market are so keen to enter the with-profits market.
I mention this because it is your PI insurance and your hard-won reputation that they are playing with. Consider that, according to key features documents, a with-profits ann uity calculated using a 5 per cent bonus rate will see the annuity fall if 5 per cent is achieved. Consider also that a non-profit annuity calculated using a 6 per cent return, based on £100,000 purchase price at age 65, produces inc ome of £9,000, while a with-profits annuity produces £8,800 based on a 5 per cent assumed bonus rate. You do not have to be an actuary to work out something is not right.
The message is cav eat emptor – after all, you are buying on behalf of your client and must take reasonable care. When discussing with-profits annuities, interrogate the company and ask them about their mortality basis. These products have worked very well but their opaqueness must be scrutini sed by the IFA in the light of a trend toward reduced charges and stakeholder arrangements.
So, your client is settled into retirement, you are mana ging their income and carry out annual reviews. What next?
Eventually, their spendable income will not meet rising costs. This is the time to consider equity release. I forecast this will become an inc reasingly important market. As people live longer, their real income will fall against rising costs and the only solution will be to utilise their home to bring income back to desired levels. For this reason, I bel ieve the property – often ign ored – should be reg arded as a capital sum avail able to support retirement.
Once again, the IFA will need to do his homework – is an income-based scheme or cash release required? Inc ome-based provides a guaranteed income for life whereas cash provides a lump sum that will need investing.
The third area of advice is long-term care. This represents an enormous opportunity and advice at retirement will lead to LTC business as this market develops.
Convinced this is a market for you? The next step is to gear a marketing campaign aimed at those at or in retirement. There are many groups and clubs for the retired that are looking for interesting speakers. Local newspapers are also keen to hear about such issues.
This market offers a long-term business opportunity for IFAs post-stakeholder. The market is driven by increasing client need and is the natural place for the IFA to develop their business.