Retirement planning is a complex task and with recent demographic, economic, regulatory and legislative change, support and advice from well prepared financial planners will be required more than ever before.
When advisers plan their clients’ likely route through retirement it is important to understand and navigate the potential risks involved. This is another area where advisers can provide value to clients by helping them understand and mitigate these risks where possible.
Great emphasis is correctly placed on investment risk, especially when advising clients on income drawdown, but it is important to remember that this is not the only ‘game in town’. Adviser clients need to be aware that risk can present itself in a variety of ways, including:
• Longevity risk: the risk of living too long
• Mortality risk: the risk of dying too early
• ‘Day one’ risk: the risk of putting all of your eggs in one basket
• Insurer credit and counterparty risk: the risk of default at a provider or counterparty
• Inflation risk: the risk of inflation eroding the future value of retirement income
• Interest rate risk: the risk that interest rates will fall and affect capital/income returns or future annuities
• Legislative and regulatory risk: the risk that rule changes may affect client income levels and flexibility
• Timing risk: the risk attached to the timing of securing retirement income
Increasing longevity and the changing requirements during retirement
It is a fact that in the UK on average people now live longer, which means that their pension pot, which is obviously designed to provide a sustainable level of income, needs to be stretched out over a longer period.
It is also acknowledged that people will generally move through a variety of life stages during retirement. Each of these life stages will come with different requirements, including that the client may have varying income requirements, health and medical status and attitudes to risk and loss during these different stages.
Advisers should therefore help their clients visualise their future requirements as well as recognise the long-term effects of their product selection. The requirement for flexibility is also underlined here.
Of course client circumstances will vary but advisers can develop a framework to tackle key issues and considerations with their clients. As they learn more about the needs of their own client segments within the various life stages, they can seek to tailor the framework for their retirement advice proposition.
These life stages post-retirement can be categorised in a variety of ways but we at Defaqto define them as: active, passive, assisted and supported. Assumptions will need to be made and agreed about the likely length of time that the client may experience, and on the spending needs, within each of the four phases. The client’s health, lifestyle and family commitments should be taken into account.