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Keeping retirement flexible

The latest annual LV= State of Retirement report provides new insight into the first few years of people’s retirement. Some of the conclusions are not only startling, but could have profound implications for advisers, and the way they consider financial advice for their clients approaching retirement.

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We all know that retirement represents a seismic shift in anyone’s lifestyle. For many, the immediate post-retirement period, changing from the daily routine of work to suddenly having time to fulfill their long-held aspirations, can be even more busy and hectic than the last few years of their working life.

As well as changes to lifestyle, this period can also result in financial upheaval – the after-effects of which can be felt for many years into retirement.

The LV= research illustrates this with some examples – 20% of people updated or renovated their property, and 25% of people move house completely in the first 5 years of retirement. A reported 34% of people reported the birth of a grandchild during this time.

To some extent, these scenarios are relatively predictable, and can be built into the retirement planning process. However, there are other, more unpredictable, strains on people’s financial resources that need to be considered, if not directly planned for.

Our research showed that 17% of people interviewed had to support family members financially – help their offspring pay off a student loan or get on the property ladder. Alternatively, some people find themselves needing to help out parents whose health deteriorates and need long term care.

Not all of the changes during retirement represent a drain on financial resources. Indeed, 6% of people reported that they had returned to work in at least a part time capacity, and 7% report receiving an inheritance.

What the report highlights is the need for flexibility in the retirement planning process. Clearly, those people least likely to be able to cope with changing income needs are the less well off. Traditionally, these people are sold standard annuities – the certainty of income has an attraction,
and there has been a hitherto lack of any cost effective low risk flexible solution.

However, recent innovations in the at retirement landscape have challenged this viewpoint. The launch of third way, or fixed term annuities, such as the Protected Retirement Plan from LV=, provide an alternative to a conventional annuity. This provides customers with a fixed income for a fixed period with a guaranteed maturity value at the end of it.

Fixed Term annuities are not risk free – the lack of flexibility during the term and the uncertainty of the income that the Guaranteed Maturity value can provide are the key risks. However, they can be a cost effective way to give clients the flexibility to review their circumstance at the end of the term, which they strive for.

The LV= research also revealed that 24% of people develop a serious illness/ worsening of their general health in the first 5 years of retirement. If these people subsequently qualify for an enhanced annuity, it could ultimately increase their income in retirement by up to 20%. Similarly, 6% of our sample reported the death of a partner during this time. If this results in the purchase of a single life annuity, as opposed to a joint life annuity, the result could be a 15% increase in income.For these people the purchase of a fixed term annuity can bring significant upside, and a lot more flexibility.

There are thousands of people coming up to retirement every week, entering the unknown and trying to transition between working and retired life. Many of these people will find themselves in a very different set of circumstances five years down the line, and it could then be too late to change the way they can access their retirement funds. Therefore, it’s important people make sure they understand all the options available to them, both immediately and later in retirement, and you consider carefully whether an immediate annuity is the right option – especially if they are still in good health.

Matt Trott is Head of Annuities at LV=

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