We recently celebrated the birth of a new grandchild. Unfortunately for the baby and mother things did not go smoothly. From an outsider looking on, it appeared everything was done correctly with regard to the problem facing the health professionals at that time. However, with the benefit of hindsight, ‘if only’ something else had been done, the next problem may not have occurred, or if it did, may have not had such profound impact.
Both mother and baby are now doing well. However, now that the worries are over, I can see parallels with retirement income planning.
For example, most people approach retirement income planning from the point of view of, ‘how do I convert my pension savings into pension income?’ Until the pension freedom reforms this meant buying an annuity.
If an individual has guaranteed income sufficient to meet their regular outgoings, do they actually need further regular income? Would a reserve fund that can be drawn upon when required for unexpected outgoings and special treats be more appropriate?
On the other hand, if the individual has minimal pension savings, should they be looking to convert them into regular income? Would there be more value to the individual from the enjoyment of just spending their savings rather than receiving a small meaningless regular income?
The above thought process is very linear. How does one decide where the boundaries lie that determines whether a lifetime income should be the primary objective? This question establishes what the art of retirement income planning is for advisers. What may be best for one client may not be suitable for another with exactly the same assets. Personal circumstances and attitudes will determine the actual plan and advice.
If a lifetime income is the primary need, what degree of inflation-proofing is required? What provision should be made for dependants? If an annuity is not used, what measures have to be taken to ensure the probabilities of outliving the pension savings are minimal?
So far, I have looked at pension savings as if they are held in isolation. This will rarely be the case. Those who retire today may have large funds in ISAs. Who owns all those insurance bonds sold over the years? Proceeds of share save schemes; demutualisation shares and privatisation shares, often remain in the hands of the original owners. Which of these other savings should be drawn down before touching the pension savings?
What other impact do these have on how the pension savings are used? Does this affect decisions about how the pension savings should be used? Consider the individual whose attitude to risk is low but holds as much in one company’s shares obtained through share save schemes as they have in pension savings.
If the emphasis is to look at just the pension savings, the possibility in a few years of an ‘if only’ situation arising is increased.
We are presupposing of course that that the retiring person is in fact following a traditional retirement of working full-time one day and being retired the next. What if they are phasing in their retirement? Do they need to draw on any of their retirement savings just yet? If they do, how much income do they need? Where does state pension age fall in these plans? How will the state pension affect their income needs?
Already we have introduced a large number of variables into an individual’s retirement income planning. But what of their housing situation? As well as income to live off, retired people need a roof over their heads. Are they mortgage-free? If they have the desire to remain in their house for as long as they are able to do so? If they are not, do their moving plans mean they may receive a windfall and when? How will that impact on plans for their other retirement savings.
What if they have an outstanding mortgage? How is it to be repaid? By moving house, retirement interest-only mortgage or through equity release. Indeed, over their retirement some may use a combination of all three. But what if they are going to rent in retirement? How much more income will they require? Will they be able to obtain assistance through the benefit system?
All the time the maze that has to be unravelled is becoming more complicated. Yet I have not tackled the most complicated issue – will they be able to generate sufficient sustainable income from all their resources?
Before looking at products it is essential to go through all the above with those who are about to retire. Such an approach can open up new horizons to what their retirement could be like. On the other hand, failure to do so could create an ‘if only’ situation which everyone, particularly advisers, should work to avoid.
Bob Champion is chairman of the Later Life Academy