Almost three years on from the start of the pension freedoms, people approaching retirement are looking for the most effective and efficient way to use the flexibility, while also balancing the various risks that come with this freedom of choice.
While there are undoubtedly many opportunities, there are also challenges for both clients and their advisers.
The way in which retirement is planned for will continue to change – not least because the way people are living and retiring is fundamentally changing, as are the rules for and taxation of retirement planning solutions.
Since April 2015, the pension freedoms have:
- Increased choice for individuals
- Given responsibility for decision making at retirement to individuals
- Shifted risk to individuals.
In practical terms, the cost (and opportunity) to the individual of increased choice in retirement is that they are now responsible for managing the big four retirement risks of longevity, inflation, flexibility and volatility.
All of which underlines the need for a far more dynamic approach to income management than ever before.
Balancing the four risks is, in itself, no mean feat. But there is more to consider. In addition to the fundamental risks, individuals and their advisers will also need to reconcile a number of other factors:
- Retirement is for a long and – importantly – unknown time frame (and many underestimate this time frame).
- Financial needs change over time.
- Attitudes to risk will likely change during the period of retirement. The concept of taking too much risk is perhaps easier to understand but taking too little and being locked into low yielding assets for a lifetime is not sufficiently discussed.
- Some difficult choices will need to be made. Very few of us are wealthy enough to not need to prioritise our objectives in retirement and make trade-offs.
- It is expected and acceptable that emotions sometimes drive decisions. For example, not selling the family home to trade down to release equity.
All of which means that creating an income strategy for a portfolio that clients will likely have to live off for some 30 years is a sophisticated multi-goal challenge. All the more so when we accept that during decision making, we have competing objectives and that any solution (or combination of solutions) is therefore likely to need to satisfy a blend of both pure financial and emotional goals. Success without proper financial planning will require a whole heap of good fortune.
Phil Wickenden is managing director of Cicero Research