People do not ask their financial advisers how long they have to live. They ask if they have enough savings.
Having enough money to be comfortable financially in the future is what matters, but without knowing how long their life will be, it is a difficult question to answer. It is one that strikes at the heart of the challenge advisers face in the era of pension freedoms.
People now have the ability to manage their money as they see fit, but this choice means decisions about retirement income are increasingly complex. This point was something we recently tackled at a roundtable with a number of advisers and industry experts who deal with retirement planning.
Trying to determine the exact amount an individual needs to provide for their future is a near impossible feat. Many factors influence whether people have enough for retirement: how much they have saved in various pensions or ISAs, other assets they could potentially rely on, how long they are likely to live, and who else they may have to support financially.
Back to school
Those of us in the profession get absorbed in the numbers: how much people have saved in their pension pot, what shape of income they would like in various phases of retirement, what affect market movements are having on pension savings, and for those entering drawdown, what income level is reasonably sustainable.
We carried out an analysis with technology provider EValue and its stochastic modelling found the sustainable income rate should
be viewed as a sliding scale dependent on a client’s circumstances and attitudes.
This was also the consensus from the advisers and industry experts at the roundtable. There is no magic number that can be set at age 65 and left for 30 or 40 years: planning a retirement income is far too complex to be done once or to be boiled down to one number.
While the numbers are important and form the basis of income planning, it is apparent speaking to advisers that it is life events that prompt people to review their retirement plans, and when and how they access savings.
Moving into retirement is one life event, but other triggers include home improvements, paying down debt or long-term care. Something increasingly integral to retirement planning is the desire to support children or grandchildren, to get on the property ladder or pay university fees, for example.
Millennials, the children of those at or near retirement, are, and will remain for the foreseeable future, struggling financially. While people want to support their offspring, one adviser at our roundtable discussion said people should not let the intergenerational tail wag the lifestyle dog. Inheritance planning and wealth transfer should form a key part of later life planning but it is important this does not come at the expense of a retiree’s quality of life.
Research from the Financial Conduct Authority has shown nearly half of all drawdown sales are non-advised and many of the factors that feed into securing the right income level are hard to grasp without the support of professional advice. The financial advice market review has a vital role to play in supporting retirees who go it alone to have wider choices around guidance and advice.
One of the avenues the government is exploring is the role of streamlined advice for decisions such as buying an annuity. The government should widen the net and explore whether streamlined advice could also focus on supporting retirees who have decided they are going to access their pension through drawdown.
If this successfully draws people into the advice arena it could prevent some people struggling financially in later phases of retirement.
Steven Cameron is pensions director at Aegon.