Planning for retirement may not feel like an immediate priority for every client, especially with an increase in the normal minimum pension age on the horizon.
However, “the sooner you plan for that life of no longer working full-time, the nicer the life you’re going to have,” as Stewart Sanderson, senior private client director at Brooks Macdonald, puts it.
Fiona Tait, technical director at Intelligent Pensions, lists the following as key questions in retirement planning:
1. How much will the client need in retirement?
The usual starting point is the client’s income and expenditure, but Tait notes that it can be difficult for clients to imagine their life in 10 or more years’ time.
“It is [therefore] important to have a comprehensive breakdown of their current lifestyle costs, including essential expenditure, debt repayments, leisure activities and one-off expenses. This then allows the adviser to consider which expenses are likely to appear or disappear at retirement and make relevant adjustments.”
2. When are they likely to need it?
Most clients still expect to retire in their mid-sixties or close to their state pension age, says Tait, making it likely that retirement income will have to last for 20 to 30 years.
3. How long must the income last for?
While longevity has by far the greatest impact on the amount of money required to fund retirement, Tait says this is often underestimated.
“It is not sufficient to simply plan for average life expectancy since, by definition, half of the people of that age group will live longer than average. In addition, it is known that wealth is a key factor in increasing longevity and it makes sense therefore to plan for at least 30 years where the client is in good health.
“Once it is known how much income will be required, and how long for, it will be possible to estimate how much the client will need to save to build up the necessary funds, taking into account the value of any other existing assets.”
Looking beyond pensions
Four in five retired respondents and three quarters of those who were not yet retired said they held Isas as sources of retirement income besides pensions, according to Interactive Investor’s Great British Retirement Survey 2021.
Property wealth is also often pitted against pensions as a source of income in retirement.
But Andrew Megson, executive chairman of My Pension Expert, says many clients are extremely reluctant to regard their family home as an asset, with a mindset that they will pass the property on to their children.
While Megson notes a change in attitude as savers reach retirement and find themselves ‘asset-rich but cash-poor’, Sanderson at Brooks Macdonald says downsizing “rarely works”.
“I try to encourage clients who are in a £1m house and say they’re going to downsize to create half a million pounds to go and look at the property market, and look at what half a million pounds gets you.