Changing face of retirement financial planning

Peter Chadborn, director of Essex-based Plan Money, says many of the questions he asked his clients before 6 April are still valid post pension freedom.

Mr Chadborn says: “Some of the principles are the same but one of the first places to start is what their understanding of the new pension freedoms is and has that motivated them to get in touch.

“There can be a lot of misunderstanding of what people can do so often it starts more with an education piece but a lot of the fundamentals are the same, like income requirements, access to capital, life expectancy.

“Just because you can draw the money in any way you want, that doesn’t mean you should.”

Mr Chadborn says he encourages his clients to cover their fixed costs with a fixed source of income - such as the state pension or a final salary pension - with any shortfall being made up by something like an annuity.

Danny Cox, a chartered financial planner with Bristol-based Hargreaves Lansdown, says: “Certainly income drawdown is not a contract you can buy and forget about. There is no default option available for that type of scheme so you have to be engaged with the process.

“Your pension will have to fund your retirement for 20 or 30 years, perhaps longer.

“It is important to understand what is realistic in terms of income in relation to the investment you are taking, and then you have got considerations about inflation and long-term care.

“I think it is still relatively early days and I think what we will ultimately end up seeing is people using a combination of their state pension and an annuity as a guarantee and then income drawdown. A mix and match is the most sensible way of taking retirement benefits.

“We have seen changes to pensions which are now inheritance tax free and have got the prospect of the main residence allowance.

“We have got a lot of change going on at the moment and I am not sure those changes have been fully digested by advisers, let alone their clients yet.”

Inheritance tax planning could potentially play a far bigger part in retirement planning moving forward, Mr Cox says.

He says when you have got retirement lasting longer than most people think it will it is far more important for people to get their own financial needs addressed first and look at inheritance tax planning second.

Independent pensions expert Alan Higham says the first thing he would say to a client is they need to make sure they have got enough secure income to last them for the rest of their life.

So he says clients should be forced to think if their state pension could cover it, or their final salary scheme.

If they conclude they have not got enough security in their income to cover their expenses then Mr Higham says advisers should explore ways of increasing it.

He says: “The first one is buying an annuity and the second one is deferring taking your state pension, which will grow and give you extra income, which could be a much better way of getting a guaranteed income.

“Having a guaranteed income makes using the pension freedoms much easier to do because the thing people have to think about is how long their money has to last.

“If you are too worried about running out of money people tend to hoard their savings, probably put in cash because they are risk averse, so people just eek out an existence and probably don’t spend as much money as they could.

“If you bite the bullet and spend a bit of your capital then you can relax knowing things are secured.

“In 25 years an awful lot can happen in the tax system and it might not be tax free by the time you die.

“If people who know they have got to make this pension pot last a long time when they first start to enter retirement the default will be to go into drawdown.

“I don’t think people will be that sure what their exact needs will be and I think they will be very nervous about using a big chunk of capital to buy an annuity.

“I don’t think they will be sure what life in retirement will be like so they will wait to see and keep their options open.

“I think we will see more annuities being bought as people get older – into their 70s. Life will settle down and they will know what their needs are so we will see a lot more annuities being bought than in the past.”

Nick Dixon, investment director at Aegon UK, says while the options look different today when it comes down to it people’s basic retirement income needs have not changed.

At age 65, Mr Dixon notes people can on average expect to live another 24 years and he agrees the first consideration remains ensuring you don’t outlive your savings.

He says: “Drawdown can address people’s requirement for flexibility and enables them to vary levels of income and pass the asset on. However, savings remain invested in the market and there is potential for exhausting your pension pot if the markets turn against you.”

Plan Money’s Mr Chadborn says as people get older their expenditure patterns become a bit more predictable and an annuity becomes better value.

He says someone retiring in their 60s won’t get good value from an annuity unless they are in poor health.

Mr Chadbourn says: “Flexible access drawdown might take care of the first 10 years and after that a greater proportion would come from an annuity.”