Let’s consider this scenario… Mike is fast approaching retirement. He has £80,000 in his pension and owns a house worth £750,000; he feels he needs the help of a financial adviser to help plan his retirement.
The first adviser he approaches will only deal with individuals who have more than £100,000 in investible assets. So that appears to be a non-starter.
The second adviser will advise on his pension benefits but will not take account of his undoubted housing wealth. Will this deliver the best solutions for Mike?
A third adviser will advise on both his pension benefits, the alternatives available for using his housing wealth in retirement, and the impacts on the use of his pension benefits.
Now let us rewind and start this article again.
Mike has £80,000 in his pension and £250,000 to invest following a recent house move to a home worth just under £500,000. He is fast approaching retirement.
The first adviser he approaches is more than willing to take him on as a client and advise how he can best invest and use his £330,000 to generate retirement income.
As is the second adviser he approaches. The third adviser he talks to introduces the concept of using some of housing wealth later in retirement to help obtain an even better retirement.
‘We are where we are’
The reasons for the differences in approach are numerous and there’s no point reciting them here. We are where we are. I am however concerned about what these differences could mean to Mike’s retirement outcomes.
Mike does not know what his options are and the appropriateness of the various services those financial advisers are offering. The reason he moved 30 miles to a cheaper house was to be closer to his ageing parents who are beginning to need his support. Until he retires, he is willing to undertake a longer commute and work from home more often.
As with many house moves, he made an emotional decision, not a financial one. The effect however is that he suddenly becomes more attractive to a greater number of advisers.
When it comes to retirement planning, and assessing whether a potential client is going to be a viable proposition, do advisers need to look again at how they judge housing wealth?
Pension freedoms give the flexibility as to how pension savings can be used. Current annuity rates mean that many clients will be disappointed in the income they will receive if they use their pension savings to buy an annuity.
For the many, the pension savings they have are insufficient to generate the retirement income they desire. Yet, despite the recent slowdown in house price increases many could not have dreamed of their houses being worth as much as they currently are.
Housing wealth can be used in three ways in retirement:
- It can be used to generate income by taking in a paid lodger, this outcome could be tax-free;
- Releasing a lump sum by moving to a cheaper home as Mike did; or
- Releasing a lump sum or series of lump sums using equity release.
Each of the above solutions will lead to different ways of using modest pension savings.
Here comes the rub. If after a consultation with a financial adviser, an individual decides to take in a lodger how does the adviser get paid? There is no money to invest. It could be argued that the individual will draw down their pension savings at a slower rate, but is that going to make that much of a difference to the adviser’s cash flow?
If moving to a cheaper home is the desired solution, the client becomes more attractive only if he seeks advice as to how to invest the proceeds for the purposes of generating sustainable retirement income.
Equity release is unlikely to occur until the client is well into retirement. Therefore, the commission or the introducer’s fee is not going to materialise for several years, if at all.
Maybe some new ways of charging for financial planning and education are required to ensure the many potential clients who need help can identify the services they require. However, will they pay for the financial planning and education they require?
Bob Champion is chairman of the Air Later Life Academy