How to help clients make retirement income last

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The shackles have been off defined contribution pension pots for just over a year but in embracing the new freedoms people have to take more responsibility in managing their retirement income.

The ability to access pension pots earlier, from age 55, has a potential impact on how much income can be taken in later years, especially if people have not saved much in the first place. And trying to determine how much income it is reasonable to take is not easy because many factors can affect the value of a pension pot and how long it will last.

People that have had no advice may not even be aware of these factors, so there is a risk spending too much too soon or having a poorer quality of life because they are surviving on a tighter budget than is necessary.

Canada Life technical manager Nigel Orange says: “There are so many variables that can have an impact. It depends on the size of the fund, investment timing, how much income people want to take, the type of investments they’ve made, the economic landscape at the time and the age of the client.”

Making assumptions

With so many things to consider it not surprising people can base their decisions on the wrong assumptions. Intelligent Pensions marketing director and head of pathways Andrew Pennie says: “People talk about average life expectancy but if you’re working to an average there’s a one in two chance of getting it wrong.

“People often overestimate how much they can take from their plan. They can overestimate the state pension, and underestimate how long they will live as well as things like long-term care costs.

“The Government is getting worried about this because a year on from pension freedoms it is seeing some people make poor decisions with poor outcomes and running out of money.”

People often overestimate how much they can take from their plan. They can overestimate the state pension and underestimate how long they will live, as well as things like long-term care costs

Sanlam UK head of employee benefits Elliot Silk points to pension statements showing what people perceive to be big figures, putting them in a comfort zone that they may not be a reality.

He says: “We need to strip it back and relate it to salary. If the average life expectancy is 85 and you’re retiring at 65 you’re probably going to live for another 20 years, which is effectively 240 pay days.”

Orange pitches the idea consumers should be tested on their understanding of drawdown. “I don’t mean as a legal requirement but it might be a good idea to have a set of questions so clients can think about the implications,” he says.

Advice

Consensus across the industry says people that take advice have the best chance of getting the most suitable outcome for their personal circumstances.  Cashflow planning is one way to get a general idea of the sustainability of retirement income.

Towry head of retirement planning Andy James says: “On top of that there are issues about pound cost averaging and holding sufficient cash so that people can fall back on that if the market falls.If you are taking money out when the market is going down, you are taking an even bigger chunk out of the pension pot. I suspect most people would understand the issues if they are taking advice and would have some form of protection against market falls. But some people are jumping into drawdown and running out of money where the market has taken a tumble and they can’t get back to where they were.”

That said, it is widely acknowledged that cost is proving to be an obstacle to advice in some cases. Portafina managing director Jamie Smith-Thompson says: “The potential cost of financial advice puts people off, which is especially understandable for low earners and people who haven’t experienced the benefits of advice. Advisers that charge a percentage fee go some way towards removing this barrier for clients, and it could be worth considering replacing Pension Wise with vouchers for regulated advisers, so people can get real recommendations tailored to their circumstances.”

Mercer partner and commercial leader of its consumer business Richard Wilson thinks we need better education and guidance around the options at retirement, with advice available where necessary. He says the real challenge is how to bring advice to the masses in a simple and affordable way. He points out that lower-cost telephone advice services have not really taken off.

“Do people only trust face-to-face advice? If it is a trust issue do, we need to make better use of technology such as Skype and Facetime?” he asks.

Wilson is concerned that people could be making bad decisions about their retirement savings while under the impression they are well informed and making the right choices.

The right tools

Of course, even if people are encouraged to take advice some will choose not to.

Aon Hewitt partner and head of DC consulting Sophia Singleton highlights recent research undertaken among 2,000 of its scheme members last year, which showed almost half wanted to make decisions themselves with friends and family.

But while there are plenty of online resources to help them make decisions, people will only use such tools if they know about them and how to use them. Singleton favours those that are clear, concise and easy to use. She also reports renewed interest in face-to-face retirement seminars in the workplace. “They went out of fashion, probably because if the cost, but we’re seeing a resurgence of them,” she says.

The Government’s plan to introduce a pensions dashboard in 2019 is widely supported but there are concerns that this tool may be too complicated to build by the proposed launch date. Some in the industry also believe a dashboard should show all aspects of people’s financial lives, not just their retirement savings.

Providers have designed their own tools to help advisers and clients deal with the sustainability of retirement income. For example, 7IM’s 7IMagine app has a gaming style tool called MyFuture that helps advisers show their clients what they can and cannot afford in retirement and how they can address savings shortfalls.

But there is a feeling among some in the industry that online tools in general could be better. Orange says it can be difficult to change some of the criteria such as growth rate assumptions and Pennie says most tools focus on do not account for post-retirement.

Broadstone technical director Dave Brooks complains that many tools are bland. He says: “What needs to happen is for people to work through their income needs. What do they need to cover off regular costs? What other regular income do they have and how long will this last? If the data going in isn’t clearly thought out the results will be either meaningless or misunderstood.”

Brooks says balancing retirement needs is complicated as people’s income needs fluctuate during retirement, starting high, falling in the middle and rising again if they have long-term care needs. “The elephant in the room is how long that person will be around for, and how and when the income needs will fluctuate,” he says.