Over the last few months, I have studied the FCA Thematic Review into Retirement. It has challenged my thinking about retirement and the challenges facing financial planners. So, we ask, "Retirement: what is it good for?".
Below are two case studies:
Case Study One
Imagine a financial planning firm that operated without a clear retirement strategy. As clients approached retirement, they were left to navigate their retirement income with their existing risk profile, relying on selling units for income. This lack of a clear strategy led to potential pitfalls and challenges.
Case Study Two
Consider a couple I recently encountered trying to determine if they had enough money to retire. The financial planner, however, was only considering a solution for one of the pair, neglecting to account for their combined assets and needs. This case underscores the importance of comprehensive financial planning that includes both partners.
It's important to note that the complexity of retirement planning is not to be underestimated. Even in the cases I've presented, where all the facts may not be fully disclosed, the intricacies of retirement planning are evident. This underscores the need for professional advice in navigating this increasingly complex landscape.
Why Is the FCA Concerned?
As I have developed propositions for financial planners, it has become clear how complicated retirement planning is and the opportunities to demonstrate value. In this blog, I want to touch on some of these. I call it the retirement conundrum.
I often use this to illustrate what we face at retirement:
We live longer, are worried about whether we can afford to retire, and the golden age of guaranteed pension schemes has passed. Navigating and making the right decisions is becoming increasingly complicated. Looking at this and the two scenarios at the start, we can see why the FCA is concerned.
Inflation, longevity and tax
Inflation (the silent killer) is crucial because it erodes what we can afford to buy. When I started managing defined benefit schemes in the late eighties, a lady was receiving a pension of £60 per annum. She began receiving this in the early sixties, and it never increased. What she could afford then, she couldn’t afford now. Just because inflation has been low for the last ten years doesn’t guarantee a path into the future.
The second factor is longevity. Today, a male 60-year-old has a 1 in 4 chance of living to 92. This means any savings to provide income must last a long time.
There is also tax, which is the most efficient way to receive income in retirement.
Delivering on income in retirement
Far from being negative about the FCA paper, I believe this is a defining moment for retirement planning. It also provides opportunities for financial planners to demonstrate value within their proposition.
Before we even start, a couple entitled to the entire state pension will receive circa £23,000 p.a. A recent report by the IFS showed that expenditure goes down in retirement.
The point is that managing needs and expectations is becoming increasingly complicated. Switching income on and off to reflect different needs at different times is a crucial element of retirement planning.
Managing Income
One of the other aspects is how do you manage income:
- Annuities: Buying a guaranteed income from your fund.
- Selling Units: Selling down units within your fund to provide an income supported by many academic papers.
- Natural Income: Taking an income from natural income.
There are probably a hundred more you can add. New solutions are coming to the market every day, and tax also plays a big part in ensuring the right solution is delivered.
Conclusion
We started with two scenarios that reflect some people's approach to retirement planning. The latest FCA paper is good for consumers and financial planners. Financial planners have a massive opportunity to really help consumers in retirement. Consumers, in turn, should be able to feel comfortable knowing that they will be okay in retirement.
Disclaimer: Please note these are my thoughts. There are no recommendations within this. I am not regulated, nor can I provide advice. I would always recommend seeking advice from a financial planner before making any investment decisions. Investments can also fall and go up, and past performance is no guide to the future.
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