'Retirement will never be the same again'

However, this newfound freedom comes with a transfer of risk and need to make money last longer. To better understand this changing landscape, we need to examine the key themes of timing, risk and planning. 

For decades, we have structured our lives around working for most of our time and taking only a brief period of retirement.

Nowadays, with the advent of improved healthcare and healthier lifestyles, people are living longer, with many opting for earlier retirements.

This means that it’s essential to plan for the longer term, considering the length of retirement and the desire to pass on wealth to beneficiaries tax efficiently.

Instead of being forced to invest in annuities regardless of value, clients are now choosing to maintain risk in the decumulation phase of their planning as higher inflation erodes the real value of their wealth. The result is the need to stretch the funds saved during our careers over an extended period, making effective financial planning critical.

A second major shift has been the reduction in defined benefit pension schemes. Very few of these have survived over the years, and most are in the public sector as companies cannot afford to provide a guaranteed level of income for their ex-employees indefinitely.

One size no longer fits all, and a wide blend of products with various tax treatments is now crucial.

Most schemes have moved to the defined contribution model, where an employer will contribute an amount, often matched by an employee, and the return is based on investment decisions and performance.

So, as the risk has transferred from company balance sheets to individuals, people must now wrestle with strategies like flexi-access drawdown to offset the lack of guaranteed income in later life.

The shift towards DC models creates uncertainty for retirees, potentially forcing them to delay retirement if savings are insufficient.

Unexpected events like Covid, war and high inflation have impacted people’s retirement plans, forcing them to engage more with their money. These changes created potential opportunities for some, while causing instability for others.  

Options are available

The additional flexibility of DC pensions means the wealthy can now use pensions as a multi-generational tool.

The increased time horizon beyond their lifetime can provide an opportunity to increase the investment risk within the pension. Conversely, if your pension savings are central to meeting your retirement needs, the transfer of risk makes market volatility a more prominent theme.  

You may need to take some investment risk to protect against inflation but also want to shield your pension from big swings in value. 

Good planning and diversification is key in adding value for clients in their retirement journey as legislation evolves.

Given the increasing complexity, clients are using a multi-strategy approach that incorporates conventional portfolios across the main asset classes and regions, with things such as business relief products.  

Diversification is also vital at tax wrapper level, more sophisticated strategies to blend pensions, Isas, investment accounts, and bonds are required to deliver tax-efficient withdrawal strategies.

Not engaging won’t be an option.

Having different tax wrappers allow clients to be agile as access and tax allowances regularly change over the years.

For example, the minimum age for drawing from private pensions is increasing to 57, and capital gains tax exemption has been reduced by 50 per cent. One size no longer fits all, and a wide blend of products with various tax treatments is now crucial.  

Staying on top of this is key, and clients must have a long-term plan or work alongside an adviser for guidance. Not engaging won’t be an option.

As part of this, advisers must continue to consider annuities for fixed costs or cautious clients.

The core plan for retirement, however, should be underpinned by a holistic lifetime financial model (cash flow) that will help plan for different anticipated scenarios, including poorer than expected investment performance or, for example, a need to spend capital on care or other one-off costs.

This type of resilient planning can help mitigate the impact that investment risk can have on retirement plans.

Through active reviews of risk appetite with an adviser, clients can manage the level of risk they take in their portfolio as they approach retirement and the need to draw on capital.

Many investment firms manage specific portfolios to help clients mitigate the impact of sequencing risk when drawing on their wealth.

Retirement has changed and will continue to evolve. Fortunately, there are options available that, if used properly, will allow for lots of flexibility, tax efficiency, and the building of a strategy that can help clients reach their goals and make the most out of their extended retirement.

Saisha Penny is private clients manager and Stewart Sanderson is head of private clients at Brooks Macdonald