A retirement planning model for the new pensions world

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      CPD
      Approx.50min
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      CPD
      Approx.50min
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      pfs-logo
      cisi-logo
      CPD
      Approx.50min
      A retirement planning model for the new pensions world

      For the past 100 years, retirement risk has been managed by focusing on longevity through the ‘compulsion’ of annuities and the setting of maximum income levels from drawdown contracts. The Budget changes remove this established, but arguably simple, risk management framework, by introducing some fundamental changes for individuals. After April the legislation will:

      • Increase choice for individuals,

      • Give responsibility for decision-making at retirement to individuals, and

      • Shift risk to individuals.

      In reality, the cost to, and opportunity for, the individual of increased choice in retirement is that the individual is now responsible for managing the ‘big four retirement risks’ – longevity, inflation, flexibility and volatility.

      They are complex risks, even for the most seasoned financial services professional, and will be daunting for the majority of individuals approaching retirement. Even more so than before, it is vital that financial advisers are able to determine the appropriate balance of objectives for their clients, obtain the client’s buy-in, and therefore recommend a retirement solution which best meets those objectives while appropriately managing risk.

      In addition to the fundamental risks, individuals and their advisers will need to consider a number of other factors. Thoughts that should be kept in mind include:

      • Retirement is for a long and, importantly, unknown timeframe (which many underestimate).

      • Financial needs change over time.

      • Attitudes to risk will change during the period of retirement.

      • Choices will need to be made. Very few of us are wealthy enough to not need to prioritise our objectives in retirement.

      • It is expected and acceptable that sometimes emotions drive decisions. For example, not selling the family home to trade down, or taking lower-risk options even though they give lower returns because they provide peace of mind.

      During decision-making, advisers acknowledge that their clients have competing objectives, and that any solution is therefore likely to satisfy a blend of both pure financial and emotional objectives. Ultimately, the role of the adviser is to create a good retirement outcome in all situations while taking an appropriate level of risk.

      Current products need to evolve

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