Michael is single and in his early 60s. He begins to look at what his retirement will be like. He goes online to find out his State Pension age and realises he will not receive his State Pension until he reaches age 67. He was expecting it to be 65.
He then uses the State Pension forecasting service and was hoping for something between £8,500 and £9,000 a year. Although he has paid enough National Insurance contributions to qualify for a full State Pension, he will only receive £7,600 as he was contracted out for many years.
Now he turns to his personal pensions. He expects by age 67 to have a pension pot of just over £100,000 so he does not need to worry too much about those State Pension disappointments.
He has never really looked at all the pension ‘gobbledegook’ he receives from his pension providers although remembers people talking about annuity rates being 8%. Now, £8,000 on top of £7,600 will mean that he will receive £15,600 a year. Less than the £17,000 a year he was hoping for, but by cutting out a few luxury items from his expenditure he feels he should be able to manage.
But Michael is disappointed again. Single life annuity rates for a healthy male age 67 are currently around 5.5%, reducing his annual income to £13,100. These rates are for a level annuity meaning that under 60% of what he considers to be a modest income will be inflation-protected. His living standards will therefore reduce year on year as the buying power of his income reduces.
He is now not sure how he can cope with a reduction in income from his current earnings of £35,000 a year to £13,100. He will clearly not have the retirement he dreamt of.
Michael realistically wants another £4,100 a year ideally with some inflation protection. To provide this he needs more than £100,000 in his pension pot to provide what was the minimum retirement income he was hoping for. Even that is two years later than his expectations. So, what can Michael do?
He speaks to PensionsWise and is impressed with the guidance they give him about his pension options. However, they could not advise him how to close the gap in his income shortfall and they recommend he speak to a financial adviser.
Financial advisers, however, are not magicians. They can use their knowledge of products, taxation and investments to help their clients reach their retirement goals but they cannot magic £100,000 out of nowhere for someone close to retirement. Michael does however own his house which is worth a little under £400,000 and he paid off his mortgage over 10 years ago.
The ‘Michael’ situation will be familiar to many advisers in the retirement space – someone who believes they have significant pension savings but are disappointed with the retirement income that can be generated. To start, Michael needs to consider his lifestyle choices and the good news is he’s fit and healthy for his age, so:
- Is he going to work beyond age 67?
- Is he going to use his house to fund part of his retirement income?
Michael needs to answer these two questions before a financial adviser can help him. However, he may need an adviser to help him understand the consequences of those decisions.
For instance, if he wishes to work beyond age 67, will he work full-time or reduced hours? In which case, what about his State Pension? Will he defer it? Will he draw it? Will he recycle it as additional pension contributions to build a bigger pension pot for when he eventually retires? While the decision to continue working may be an emotional one, the consequences will deliver different financial outcomes.
If Michael is prepared to use his house to finance his retirement income will he move to a house worth less? Will he stay where he is and draw on his equity later in his retirement? Again, these are emotional decisions, but they will have consequences on Michael’s financial decisions. Would it be wise to buy an annuity, if soon after, a lump sum which can be drawn down were to become available? Similarly, when would be the opportune age to use equity release and how should the pension savings be used in conjunction with equity release?
Michael’s solution therefore may be a combination of both working longer and using his home to add to his retirement income.
I have deliberately kept Michaels’s situation simple. You can easily add further elements to his situation, for example, a parent in care, a spouse, children and grandchildren. The more you add, the more complicated the situation becomes before you get to what a financial adviser traditionally does – advise on products, tax and investments.
Many retirement decisions will be influenced by the emotional decisions of the client which the adviser has to respond to. This could lead to you finding yourself outside your comfort zone. When it comes to retirement income planning, who decides what? The client or the adviser? Is the adviser equipped to help lead the client through the decisions that have to be made? If you don’t feel ready, it may be time to seek the training and support you need – let’s make one thing clear, the likelihood of you seeing more ‘Michaels’ in the future is pretty much assured.
Bob Champion is chairman of the Later Life Academy