When looking at the home, you hope that by the age of retirement this should be mortgage free, if not, then when assessing income you will need to ensure that this is factored in for the remainder of the mortgage. Many clients feel they will be able to release capital from their home later in life by downsizing, but a smaller house may not necessarily release the expected capital. Being realistic about the value of this is very important.
To an adviser it is clear that not all pensions are equal, but a client may not realise the major differences in what they have. A lot of the noise around the pension freedoms was all about how great being able to have flexibility is, but the reality is often very different.
Having a defined benefit (DB) scheme income in retirement, however small, is a great base to build from and getting clients to understand this can be difficult. Just the same as the state pension is a great base and should not be forgotten: a full state pension is over £8,000 per year.
Defined contributions (DC) pensions give the most flexibility in terms of retirement options, but they are also at the greatest risk up to and even into retirement if they are not used and managed properly.
Talking to the client about the pros and cons of each type of benefit, along with their other savings vehicles, will help them understand the recommendations better – a client cannot be too well informed.
Phased or blended?
Not putting all your eggs in one basket is good advice, be that a diversified investment strategy or choices at retirement. These days it is unlikely to be a single move to retirement.
The choices and options at retirement are nearly endless; it is not a case of take tax-free cash and buy an annuity on the day you cease work. With many people slowly ceasing to work by reducing their hours or changing job to reduce the pace of life, it is not a one-off decision at a single point in time that needs to be considered. It is a series of decisions and possible adaptions that need to be made over many years.
Pension advice or more importantly later life planning advice should be an ongoing dialogue between adviser and client. Priorities change as lives change and so income requirements will also change.
