Approaching retirement advice with a multi-layered approach

Mark Ormston, director of propositions and corporate partnerships at Retirement Line, says that while an annuity is often presented as this very simple product – the idea that a client can just “pass all your money to the insurance company and they will do the rest” – in reality, people are being asked to make a decision that will impact their household income for the rest of their lives and potentially beyond.

Do they want inflation protection, and if so, how much? Do they want to guarantee an amount of income is returned whether they are alive or not? Do they include a partner on the annuity policy? 

It is key for an adviser to gather as much information as possible to help inform the advice that they give to their clients.David Gibb, Quilter

If any of these are selected the immediate starting income lowers, potentially putting strains on immediate income needs.

Ormston adds: “A lifetime annuity purchase is not a decision to be made lightly and needs to be made with the long-term in mind. One way that advisers can make possible future scenarios more understandable and tangible is with multiple annuity quotes.

"When clients see a number of options in black and white, they are better able to engage in the decision-making."

Wants and needs

As advisers build up personal relationships and trust with their clients, this will allow them to help a client better understand their motivation and aspirations. 

Andrew Tully, technical director at Canada Life, says despite there being a plethora of factors influencing everyday decision-making, when examining long-term thinking, families are the single biggest influence. 

Discussing the longevity of family members can be key to determining how much someone will need to save for retirement.David Gibb, Quilter

Tully says: “By recognising the important role families play in this form of thinking, there is an opportunity for advisers to leverage the emotional connections and psychology that sits behind this to build better engagement with their clients and encourage a longer-term mindset to financial planning."

David Gibb, chartered financial planner at Quilter, says when armed with a deeper understanding of their clients’ needs and wants, as well as any other factors that may impact both their personal and financial circumstances, advisers can provide informed recommendations that will be specifically tailored to help their clients achieve their goals.

Gibb adds: “Financial advice must be adaptable to ensure it caters for a client’s individual needs. There are many factors that will impact people’s lives and finances, and it is therefore key for an adviser to gather as much information as possible to help inform the advice that they give to their clients. 

“For example, while it is often a slightly uncomfortable conversation to have, discussing the longevity of family members can be key to determining how much someone will need to save for retirement, or if they will be likely to need to afford care services later in life.

The ability to interpret and find the right solution for a client is what great financial advice is all about.Vince Smith-Hughes, M&G Wealth

“Additionally, certain perspectives can also play a key role in financial decisions, such as views on inflation and how someone thinks it will impact them and their finances.”

Vince Smith-Hughes, director of specialist business development at M&G Wealth, says advisers tell him that the most important and fulfilling part of their job is to actually listen to what the client is saying, establish their real needs and objectives and then turn these into a meaningful financial plan. 

For those at the point of retirement, this will include the pros and cons of drawdown and annuities, while also keeping one eye on the potential for care requirements further down the line. 

Client understanding

Smith-Hughes adds: “The ability to interpret and find the right solution for a client is what great financial advice is all about. 

“One of the tenets of the consumer duty is to demonstrate client understanding, and this should include the client understanding the risks of any given approach, and the adviser being able to demonstrate that.”

Smith-Hughes notes that one way could be by videoing the client in conversation, playing back an overview of what is recommended. 

It's important clients are aware of all options and the pros and cons of each.Andrew Tully, Canada Life

“Remember, avoiding foreseeable harm is not the same as having no risks at all,” he adds. “For example, in drawdown sequencing risk is a foreseeable harm that an adviser can look to mitigate as much as possible, but investment risk is likely to be present to some degree. The question is how is it being managed, and does the client understand the risk?”

As Tully points out, retirement is also not all about pensions – many clients are likely to have assets in a number of wrappers as well as property, and using those assets in the right order can make a massive difference in terms of tax efficiency and inheritance tax planning. 

Likewise the use of trusts and gifting can be hugely helpful planning tools for the right clients. 

Tully says: “Advisers can help clients consider the best use of these different assets, and the tax consequences of different options, and make the best decisions for them and their family.

“It's important clients are aware of all options and the pros and cons of each. No solution is perfect, so the right option, or combination of options, will depend on a client’s needs and attitude."

A lifetime annuity purchase is not a decision to be made lightly and needs to be made with the long-term in mind.Mark Ormston, Retirement Line

He adds: "One of the Financial Conduct Authority's key messages from its defined benefit transfer work was making sure communications are clear and transparent. 

“So, for example, not comparing a lump sum death benefit through one solution to a yearly pension for a partner through another. Aspects like that can unconsciously lead a client down a particular route, whereas the overall benefit can be very similar.”

Cash flow modelling, which many advisers use, is an important tool Tully says can help clients build up a picture of their retirement over the medium term rather than just focusing on the here and now. 

CRPs

With increasing demands on firms; the need to ensure the cost to the client is appropriate; detailing those costs on an annual basis; demonstrating they fully understand the products they recommend; evidencing those products are in the best interests of their client; and making sure all this is done on a consistent and efficient basis across a firm may lead some advisers towards establishing a centralised retirement proposition to sit alongside their centralised investment proposition, says Tully.

A study by financial services consultants AKG found that 73 per cent of advisers surveyed said their firm had already launched a separate/distinct CRP. Meanwhile, 19 per cent said their firm had not yet launched a CRP but were planning to do so in the next 12 months.

No solution is perfect, so the right option, or combination of options, will depend on a client’s needs and attitude.Andrew Tully, Canada Life

Where a CIP is used to determine underlying assets, CRP determines how and when the income is drawn from the pension(s) in order to generate a sustainable retirement income.

And although there is no regulatory requirement to have a CRP, Tully notes it can help build a framework that enables adviser firms to manage the various interrelated risks of giving retirement advice while helping address the issues clients face as they enter retirement. 

Cecilia Furner, interim distribution director – retail annuities at Legal & General, says having a CRP framework helps the adviser to offer a clear, consistent and repeatable advice process that deals with risks in retirement – and these are very different from accumulation risk.

She adds: "It should be focused on the client’s ability to bear loss, and this is where annuities offer certainty – fixed term and lifetime – it adds longevity protection, certainty and an underpin for portfolios. Considering this alongside the benefits of drawdown for clients throughout retirement will ensure the best outcomes.”

Ima Jackson-Obot is deputy features editor at FTAdviser