Paid post by Scottish Widows

Why your clients’ retirement income needs are becoming increasingly complex

Our recent article on the different theories on the shape of income in retirement introduced “The Retirement Wave”.   

Unlike other theories, the “Wave” shows how the change from work to retirement is increasingly not a single, one-way event. It’s becoming a much more flexible journey, which has implications for how retirement income needs to be planned.

Research shows that around one in four UK retirees return to work within five years of retirement.1 This has become known as “unretirement”, with people moving between work, retirement, and back becoming increasingly common. This trend is primarily driven by increased life expectancy. As people live longer, they expect to have a longer retirement too, but overlook the fact they’ll need to work longer to support the financial cost of these extra years. Our own research shows that over 25% of those aged 65-74 feel they are still not adequately prepared financially for their retirement.2

For those approaching retirement, the rise of a more flexible retirement journey has several important implications.

The need for ongoing support

The move back and forth between working life, retirement and work again means income needs can vary considerably over the course of a person’s life. This increased complexity makes it vital that people seek out advice to help them make appropriate plans for the years ahead.

With the need for different income levels becoming less clean cut, there is a greater need for advisers to have a regular, ongoing relationship with clients. Once the initial advice has been provided and plans are put in place, a regular review becomes essential. The review ensures a client’s income continues to best match the reality of their changing retirement lifestyle and expenditure requirements.

Furthermore, as clients age, their ability to make sound financial decisions decreases significantly throughout their retirement, but with no likewise decrease in their confidence to make such decisions.3 Clients are therefore likely to need more support from family and/or power of attorney in adviser client meetings. As well as needing advice on financial planning, they will also likely benefit from help with issues such as estate planning, or how to fund long-term care.

Flexibility and choice are key

A more fluid retirement means the solutions chosen to deliver a client’s retirement income needs have to be adaptable to meet their changing circumstances and financial situation.

Our research has shown that two of the main priorities for Defined Contribution pension customers are flexibility and access, which is why Drawdown has replaced annuities as the solution of choice for retirement income. 58% now opt for drawdown, which is especially popular with those with higher levels of DC wealth.4

Many clients moving into drawdown still decide to take all their available tax-free cash at once. However, with increased demands for flexibility, and seeking out the optimal set of options, it may not be the best decision. Phased withdrawals (combining small, regular amounts of tax-free cash and taxable withdrawals) could better meet income needs and reduce tax. It may potentially also increase how long their money could last, which is especially important during periods where retirement income needs are lower due to either going part-time, or returning to work.