Bob Champion: Who is doing the selling?

In his latest column for Retirement Planner, the LLA's Bob Champion asks: who is doing the selling in financial services?

Financial products have to be sold. They are not bought.

This may be true for savings and investment products which aid the building of wealth and it is certainly true of protection products where most consumers see the need but have to be nudged to insure their own and their family’s future.

This is because wealth creation and life assurance products are purchased from earnings; individuals need to be convinced how their financial plans can be realised by using such products, before their adviser can set about the task of finding the most suitable product for them.

One of the reasons is that there is always the competition of consumerism today, for example, holidays, cars, new homes, making it difficult for the individual to identify where they will find the money to pay for the products they should have for a more secure future.

Auto-enrolment, however, reverses this situation. Pension contributions are deducted from pay before they are received and the employee has to take an action (opting out) to raise more money to pay for their spending habits.

And what about housing? Does anyone actually buy a mortgage? People purchase homes. The mortgage is the means to pay for it. They want their mortgage adviser to find them the best mortgage deal. This reduces the overall cost of buying that home. Remortgaging is the means to control that cost in changing markets.

When we reach retirement, we will hopefully have accumulated a reasonable amount of wealth. Retirement income planning is about selling off that wealth to maintain our consumer habits. In essence we sell off the family silver.

Before pension freedoms, this was achieved by transferring pension savings to an insurance company in return for an annuity. Many believed this was their only option, so the annuity adviser found the best type of annuity for them. The adviser did not have to sell the idea of having an annuity which is very similar to the position of the mortgage adviser in the house-purchase scenario.

If retirement income is funded by the selling off of the family silver does this mean that the selling is done by the individual? The family silver will commonly consist of a house, pension savings and other assets, e.g. ISAs, stocks and shares and insurance policies.

Because of the various tax treatments of withdrawals, the tax position of the individual should influence the order in which they are sold off. This is where good planning and advice comes in – done incorrectly larger than necessary tax bills could arise and future investment opportunities lost.

However, there are many different approaches. The extraction of housing wealth can be achieved through downsizing or through equity release. For many, the latter still has to be sold against the former. However, for certain individuals, this may be the better solution and avoids costly errors when selling their family silver.

Similarly with pension savings, is it now a question of annuity or drawdown; a combination of both or drawdown for now with an annuity later? But if some housing wealth is going to be realised to support retirement spending, how will that be achieved? What influence will that have on the pension decision?

Now add into the mix ISAs, stocks and shares, insurance policies and so forth and the retirement income strategy becomes even more complicated.

In essence, the consumer is doing the selling. However, they cannot do it efficiently without a knowledgeable financial planner to be their guide. The guidance provided will cover how much to sell; what to sell; when to sell it and how.

At first sight, house downsizing may not appear to fit in with the above. To me it does. Look at the questions it raises. Is downsizing the right decision? How will the proceeds be utilised? Will they be held on deposit to fund the next few years spending? Should they be placed in an ISA? Or even a pension if that is possible? What will be the impact on the sale of other assets during retirement?

It is all part of the same advisory service.

But what about annuity purchase I can hear you ask? Does that not have to be sold in the new environment? An annuity is an insurance policy to maintain income should you live longer than expected. It should be looked at as selling more today to ensure the proceeds of that sale continue for the rest of life.

So while the consumer in retirement is selling off their assets, very few are able to do so effectively. Many who are retiring today have insufficient pension savings to live off those on their own, and among the wealthy – for inheritance tax purposes – many want to run down their other assets before touching their pensions.

The sale that is actually required is putting across the value of retirement income planning and the value of having a good adviser alongside you. Once sold on that, the rest should naturally follow.

Bob Champion is chairman of the Later Life Academy