Imagine all the people… getting the advice they need

Bob Champion argues for the inclusion of housing wealth in retirement planning advice but questions if the less well off will get the help they need...

Imagine all the people receiving financial advice about their retirement

Not a line you will find in John Lennon’s seminal call for peace and tolerance I understand but still something that many people call for. But what does it actually mean in practice?

There are those who have sufficient pension savings to finance the retirement lifestyle needs they require.

In addition to their state pension, they have adequate defined benefit (DB) and/or defined contribution (DC) pensions to meet those needs. Many of these people seek financial advice.

There are several financial planning approaches that can be adapted to the circumstances of the individual and tools available to support the presentation of the appropriate advice.

But, how many people are in this cohort? This depends upon how you, or more importantly they, view the retirement they are looking for and the sufficiency of their pension savings to provide that retirement.

Data produced by the Pensions Policy Institute (PPI) in its paper, Consumer financial advice and guidance for high-risk DC savers implies this is a minority of retirees, probably less than 15% of the total.

If the retiree is not part of that minority does the advice process become any easier? I believe not.

Questions must be asked around can they afford to retire, how long should they continue to work, and are they capable of doing so?

Housing wealth

To make the conversation more palatable consideration has to be given to the use of housing wealth to augment their pension savings.

If they downsize, how will they drawdown the proceeds? Many who do not take advice live off interest generated from the cash proceeds. Would an invested solution taking account of dividend and capital gains allowances be more appropriate? How should the funds be invested and considering the risks, what would be a safe withdrawal rate from that investment portfolio?

And clearly there are other questions to be answered, for instance:

  • If they are going to use equity release at some time, when is the appropriate time?
  • How will they use equity release?
  • Would they use it in parallel to the drawings from their pension savings or after their pension savings have been exhausted?
  • If the latter how should their pension savings be managed?
  • Pension savings need no longer be used to provide lifetime income. Does the investment objective become to draw a fixed income while extending the duration of the pension assets?

Each individual will have different proportions of wealth held in DB pensions, DC pensions, housing and other assets, and different individual personal circumstances to be satisfied.

The holistic advice needed has I’m afraid, become complicated. Most will be unable or unwilling to afford the quality advice they need; unfortunately the vast majority of the individuals’ currently approaching retirement fall into this category.

Complex needs

There is another group for whom the position may be even more complex. Those who are, or will be in receipt of means-tested benefits, for example, Pension Credit; Housing Benefit and Council Tax Relief.

If the adviser’s role is to achieve the best outcomes for their client, and not to protect the Exchequer, consideration also needs to be taken of additional rules offsetting actual income, notional income from pension savings not being drawn, and savings in excess of allowable thresholds, to get the most from whatever pension savings they have.

Pension guarantee credit is an increasing benefit; therefore what is the value of a level annuity (or for that matter a DB pension) if shortly into retirement it is subsumed into the means tested benefit threshold.

Consideration may be given to taking legitimate action to reduce pension savings before state pension age so that the benefit of those savings can be enjoyed.  Alternatively, use of the savings threshold after state pension age as the fulcrum around which flexible income drawdown revolves could be another solution.

Unfortunately, many in this position will not have access to the advice they need.

The delivery of pension freedom has opened up a Pandora’s Box of solutions but these have to be applied to individual circumstances. The less wealth an individual has, the more complex the solutions they will need, yet the chances of them having access to appropriate advice becomes more remote.

It is a situation that we should all be seeking to resolve.

Bob Champion is chairman of the Later Life Academy