Ingredients of retirement planning

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.

“Do you really want to curtail the space you have to something that small, perhaps in an area that’s not where your friends or family are?”

But when it comes to other properties, Interactive Investor found that 71 per cent of those who are not retired and own a property other than their own home viewed these as pension income when they retire.

Partners and spouses may also come into the picture, although a survey from LV in June found eight in 10 non-retired, married people did not know what their spouse’s pensions were worth, and nearly half (47 per cent) had not spoken to their spouse about their retirement plans.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, emphasises the importance of a client’s marital or relationship status to retirement planning.

“Unless the partner is already financially secure, the likelihood is that the client would want to provide for them in some way should the worst happen.

“Decisions such as taking a single life annuity or not updating an expression of wish form on a pension could leave a spouse or partner in real financial difficulty. This is especially the case with cohabiting couples – there is no such thing as common law marriage and you could live with someone for many years and find you have no claim to any of their assets should they die. This is why it is important to consider any partners when developing a retirement plan.”

Claire Trott, divisional director of retirement and holistic planning at St James’s Place, also notes the importance of factoring in a partner’s income, but suggests caution.

“If they’re not married and then they split up, then you probably shouldn’t be factoring it in. Because they’re not married, they’ve got no claim on that money. 

“If they are married then you’ve got pension sharing orders on divorce, which can make sure that the funds are split appropriately if something happens.”

Other contingencies that should be considered include poor investment performance, ill health and potential care requirements, says Sanderson at Brooks Macdonald.

“I think fundamentally it’s about having some adaptability, so that when we create a plan it is a relatively cautious one.

“What I tend to do with clients is present a secondary [plan], which will have slightly lower growth rates for things like property and investments. It will have higher inflation so that they can see the cost of goods, as they’ve experienced in the last 20 years, may look very different in the next 20 years."

Chloe Cheung is a features writer at FTAdviser