Talking Point 

How to boost clients' income in retirement

  • Learn how advisers can help their clients boost their income in retirement and which strategies are best.
  • Understand how the retirement income strategy differs depending on the size of the pension pot.
  • Grasp whether the pension freedoms have had any impact on funding retirement sustainably.
CPD
Approx.30min
Investing for income in retirement
How to create a sustainable income stream to fund later life
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Investing for income in retirement

How to create a sustainable income stream to fund later life

KickerThis is a kicker.

Planning how to fund retirement is an issue facing many and it is exacerbated by the prospect of so many people living another 20, 30 or even 40 years after they have clocked off at work. The pension freedoms may have created more options for retirees, but if clients have not saved enough to fund their later life plans, then they will be constrained in their choices. Rupert Rucker, head of income solutions at Schroders, told FTAdviser why younger investors should be setting aside as much as 14 per cent of their income now if they want to retire comfortably. He also believes there are plenty of income\-yielding assets for investors to incorporate into their retirement income strategy. Watch the full video interview below.

Dearth of client savings is biggest retirement income challenge

Lack of savings is the biggest challenge faced by advisers whose clients want a sustainable income in retirement. This is according to the latest FTAdviser Talking Point poll, where 77 per cent of advisers cited not enough savings being an issue with retirement income. This was followed by 13 per cent who thought state pension age changes were a barrier when it came to helping clients achieve an income throughout their later life. Jaskarn Pawar, chartered financial planner at Investor Profile, said he was not surprised by the outcome of the poll. Mr Pawar said: The post\-war mentality of financial prudence has well and truly gone. It is the good times now and people want to spend today without too much thought for tomorrow. The issue is that people dont sit down and work out what their finances might look like over the long term. He added that auto\-enrolment was pretty much useless if clients did not have a financial plan in place for their retirement, even with the higher contributions coming in.

> The best option for someone to enjoy a sustainable income in retirement is to save as much as possible as early as possible, and then invest wisely.

Contributing any amount to a pension is futile unless you know how much you need to be investing. What is the point in investing 50 per month if you should be investing 500 per month? Mr Pawar pointed out. Royal Londons Lorna Blyth previously told FTAdviser that those customers in drawdown may not continue to enjoy the strong market returns they have since the pension freedoms were introduced in 2015. Only 10 per cent of advisers who voted in the poll said possible lower returns from stock markets were a potential challenge for clients wanting to achieve a sustainable retirement income. Scott Charlish, a financial planner at Brewin Dolphin, said retirees can maximise their retirement savings by using some planning techniques. Firstly, consider how long the funds need to last and although annuities are out of favour compared to other options, they may still be useful for those who sadly face ill health in retirement, he explained.

Also, look at the savings held and determine if any capital gains exist which can be managed over a period of time rather than forcing a single sale, which triggers a tax that otherwise might be avoided. Rachel Vahey, product technical manager at Nucleus, added: Of course, the best option for someone to enjoy a sustainable income in retirement is to save as much as possible as early as possible, and then invest wisely. The pensions gender gap has widened in recent years, yet none of the advisers who took part in the poll said this was an issue when it came to ensuring their clients achieved a sustainable income in later life. According to data from Royal London, in 2016 to 2017 the gap between men and women in terms of gross income was 85 per week, up from 31 a week 10 years earlier. _eleanor.duncan@ft.com_

CPD: How to boost clients' income in retirement

Helping clients to maximise their retirement income whatever the pot size

When most of us retire, we might hope our pension savings will help us to maintain the same standard of living throughout the rest of our lives as it did through our working lives with maybe a little money left over to leave to loved ones, or to pay for care if it comes to it. Royal London recently calculated the average pension pot size needed to avoid an uncomfortable retirement is 260,000. It refers to this as the pension mountain, having grown in size in real terms from around 150,000 in 2002. It is a reminder of just how important it is to save for retirement in order to be able to cover the essential costs of living, particularly as the state pension is only likely to cover the bare minimum. Bearing in mind many people reaching retirement will have been unable to save this much, or even half this much, how can advisers help their clients to maximise their income in retirement? **Income requirements** As Tom Selby, senior analyst at AJ Bell, rightly points out, there is no one size fits all strategy when it comes to retirement income planning. In many ways, the size of the fund is also not the key it is the individuals priorities and spending plans, and how they use their retirement pot to achieve those, that is the key, he explains. For example, a 70\-year\-old with a 100,000 pension pot who needs to spend 30,000 a year to enjoy their retirement could be said to be in a more precarious position than a person of a similar age, who has a 50,000 fund but only needs to spend 5,000 a year. Firstly, an adviser will want to establish what their clients core income requirement is. Vince Smith\-Hughes, retirement expert at Prudential, confirms the core income should cover the basics, including food, rent or mortgage payments, and bills. Obviously, this can take account of any income elsewhere, such as the state pension, he says.

> Those at, or close to, retirement age may have little option other than to continue working so that the pot and/or annuity rate enables a better income when they are older.

Ideally, this income should be secured through means such as an annuity or guaranteed drawdown or, at the very least, a sufficient fund put in very low risk investments. Once this criteria has been met, then the rest of the fund can be invested more for the longer term and in more speculative assets or funds. Mr Selby suggests: In an ideal world, many would argue a natural yield strategy where someone is able to use the income generated from their underlying investments to fund their lifestyle, thus leaving their underlying capital untouched might be followed. He recognises this will not always be possible though. This will not provide sufficient income for some people, meaning investments may need to be sold particularly in the early years of retirement when clients are likely to be more active, he reasons. **The right strategy** There are a range of options available when clients do start to take a retirement income, and which is appropriate will depend on clients individual needs, circumstances and risk appetites, Mr Selby notes. For some people, drawdown will be the right option, for others particularly those in ill health an annuity will be the way to go. Indeed, for many a combination of guaranteed income and flexibility will provide the right solution. Alan Lakey, director at Highclere Financial Services, observes that continuing in employment may be part of the retirement strategy. Those at, or close to, retirement age may have little option other than to continue working so that the pot and/or annuity rate enables a better income when they are older, he points out. Many of my clients continue working in their late 60s and early 70s as they simply underestimated the size of the pot needed to provide a sustainable income. When it comes to suitable retirement income strategies, Lawrence Cook, director of marketing and business development at Thesis Asset Management, cautions that there are some strategies and investment products to watch out for. The first of these is complex investments that appear to do everything long\-term growth with low volatility and a good level of income.

> Analysis also suggests that maintaining a cash/bonds pot for the long term is disadvantageous and is best used in perhaps the first five years of the retirement journey.

He explains: All sorts of new investment funds have been launched, each offering to deliver on all these fronts. Investors in many funds in the \[IA Targeted\] Absolute Return sector have been disappointed with their investments and if relying on these for retirement income, this can have damaging long\-term effects. He refers to a FinalytiQ report, Pound Cost Ravaging, as one of many studies which shows investing in equities is a better strategy to sustain income and capital over the long term. However, they \[equities\] tend to exhibit volatility, which is disconcerting to investors and can lead to behaviour which is dangerous, such as selling at the bottom of the market, Mr Cook notes. Therefore, most financial strategists will consider using a range of assets. For simplicity, we will consider these to be equities, bonds and cash. One could add many other assets and sub\-classes but keeping to these three helps explain a potential strategy to consider. He explains income in the early years of retirement is supported by the cash and bonds element to these types of strategies. This avoids selling equities or taking dividends, which are left to roll up for the long term. Analysis also suggests that maintaining a cash/bonds pot for the long term is disadvantageous and is best used in perhaps the first five years of the retirement journey, when significant volatility in equity markets can have their biggest impact which is compounded if drawing from this asset class to support income requirements, he says. **Little and large** Being able to boost a clients income to fund their later years becomes particularly important if their savings are finite. Does this strategy change if the client has a large pension pot versus those clients with a much smaller pot of savings? Mr Smith\-Hughes concedes: Clearly, this is generally going to be easier to achieve with a larger fund. However, it is also true to say that getting this right is just as, if not more important, for smaller funds. The individual may well not have many other assets elsewhere, so the pension pot becomes even more important. It is likely that those retirees with a more generous pension pot will simply have more choice when it comes to funding later life. One of the areas in which they will have many more options is in tax planning. Mr Selby confirms: There is clearly more scope for tax planning with a larger fund, most obviously in mitigating the income tax a client pays by managing withdrawals and ensuring those who want to pass on money to loved ones after death make full use of the generous tax rules around drawdown. The larger pension pot will be able to provide a lump sum normally 25 per cent of the fund value which can be drawn free of income tax and, by drawing down on this element gradually, it is possible to boost the monthly sum paid to the investor, explains Scott Charlish, a financial planner at Brewin Dolphin. This can then be added to the taxable element of the pension pot which will incur income tax at the appropriate marginal rate. 11,850 of taxable income will suffer no tax as it is within the personal allowance \(2018\-19\) and then can be boosted by the tax\-free element.

> The challenge for the profession and for the regulator is how to widen out access to advice, or help and guidance.

Certainly, a client with a smaller pot of pensions savings may face more restricted choice but there are still options which might take some of the ongoing decision\-making out of the process. Emma Byron, managing director for retail retirement income at Legal & General, suggests: For those with medium or small pots who are solely reliant on their DC income to meet their essential living needs and thus have limited capacity for loss, a lifetime annuity or a fixed\-term annuity is probably the right answer. For those with very small pots who want access to cash, fixed\-term annuities are a great way to take their cash over a period of time, rather than taking a lump sum and putting it in a low\-interest bank account which could potentially incur unnecessary tax charges. **Freedom and flexibility** Have the pension freedoms made it easier for clients to sustainably fund their retirement or just far more complex? Rachel Vahey, product technical manager at Nucleus, thinks the pension freedoms have been a successful innovation in the retirement market. It has been hugely beneficial for some people, she concedes. With the help of their adviser they can plan a retirement income strategy that is more flexible, adaptable, and fits more far more neatly with both their needs, but also their retirement objectives. She observes that it is natural such a radical development has led to wide behaviour change, with many more retirees using drawdown as a way of funding their retirement. The challenge for the profession and for the regulator is how to widen out access to advice, or help and guidance, to make sure everyone who uses drawdown understands what they are trying to achieve and the best way to do this, she notes. **Confusion abounds** Ms Byron acknowledges the greater choice and flexibility the freedoms have given those at retirement. But she also reveals customer research has shown many are confused by the choices they face. The FCA's recent report into non\-advised drawdown found that 37 per cent of drawdown sales occurred without advice and we have concerns that many of these individuals could be unaware of the tax implications and the investment risk they are exposed to, Ms Byron says. She agrees with Ms Vahey that consumers need better access to advice. For this reason, it's important that consumers take advice and review their plans regularly to ensure that they can enjoy the retirement they want, she emphasises. _Ellie Duncan is features editor at FTAdviser and Financial Adviser_

House View: Lesley\-Anne Morgan, Schroders' head of retirement, on the state of retirement savings

Our annual Global Investor Study \(GIS\) has revealed that investors are saving an average 11.4 per cent of their salary specifically for retirement. However, the research, which covered 30 countries, also found two\-thirds of retired investors wished they had put away more. The study surveyed more than 22,000 individual investors and found the proportions of income saved for retirement were highest in Asia, at 13 per cent, and weakest in Europe, at 9.9 per cent. In the Americas, the average investor saved 12.5 per cent of their income. Its well known that people arent saving enough for retirement but this study shows that even those who are already established investors are not putting away enough money.

> To reach their goals, people will need to save even more than savers did in previous generations.

Theres also a strong message from those who have already saved: "I wish I had saved more." The pension savings gap is further compounded by the fact were in an age of low rates and low returns. To reach their goals, people will need to save even more than savers did in previous generations. The study shows investors globally are only putting away 11.4 per cent of their income but say they want to retire at 60. Our analysis shows that someone who started saving for retirement at age 30 is likely to need savings of at least 14 per cent a year if they wanted to retire on 50 per cent of their salary. The level of retirement income savers can expect depends on: The amount contributed \(and when\). The returns achieved. How the money is invested after retirement. The length of time over which money will be withdrawn. The chart below sets out analysis undertaken by my team. It assumes a starting age of 30 with an average national salary of 27,000 that rises in line with inflation. It shows the real annual returns where inflation is taken account that would be needed to achieve two levels of income: 50 per cent or 66 per cent of your salary when you retire. These are typical bands that people aim for. It also assumes they will draw on the money for 18 years, on average. **How much savers need to save, depending on returns achieved**

So if a saver contributed 15 per cent of their income, they would require an average annual real return of 1.9 per cent \(the middle column\) to achieve a retirement income worth 50 per cent of their income. If they contributed 10 per cent of income, however, they would need a return of 3.6 per cent. Past performance offers no guarantee of future returns, but todays low\-rate world could mean investments pay less than they have done in recent decades. However, the Schroders Global Investor Study also found respondents remained optimistic about the outlook for returns. Globally, investors anticipated their investments would return 10.2 per cent a year over the next five years. If inflation were taken into account, this would equate to a real return expectation of around 8 per cent.

> Start saving at an early age and it makes an incredible difference to the eventual size of your retirement account.

Returns are also influenced by how much risk is taken with a portfolio, which in turn dictates the type of assets that are bought. However, the study also found that investors are currently averse to taking too much risk due to the uncertainty caused by international events. 59 per cent do not want to take on as much risk in their investments now. 48 per cent have put more money in cash than they had before. People in some countries tend to invest more cautiously and may therefore see lower returns. In Germany, for instance, pension savers have a preference for bonds, which typically have delivered lower returns. Such savers will need to contribute even more to ensure they realise their retirement goals. The most powerful tool available to savers is time. Start saving at an early age and it makes an incredible difference to the eventual size of your retirement account. The miracle of compounding, where you earn returns on your returns, adds up over 30 or 40 years of saving. _**Important information:** Schroders commissioned Research Plus Ltd to conduct, between 1 and 30 June 2017, an independent online study of 22,100 people in 30 countries around the world, including Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, the Netherlands, Spain, UAE, the UK and the US. This research defines people as those who will be investing at least 10,000 \(or the equivalent\) in the next 12 months and who have made changes to their investments within the last 10 years._

[Bank your CPD here](https://www.ftadviser.com/retirement\-income/2018/06/18/how\-to\-boost\-clients\-income\-in\-retirement/)

Most people know what they want to do in retirement but making sure they have enough set aside to meet those expectations is vital.

Ensuring clients have a plan in place to fund their retirement is one of the most important roles an adviser has but so often, people do not prioritise building up a sizeable pension pot early enough.

Whatever the size of their savings, the pension freedoms have given retirees more options - whether that means going into drawdown, purchasing an annuity at retirement, combining both strategies, or even working for a few more years to meet income needs.

Kim Lerche-Thomsen, chief executive at Primetime Retirement, explains: "It is always beneficial for retirees to endeavour to save for as long as possible.

"During retirement, individuals can also look to using products which provide them with a guaranteed income, such as fixed-term annuities, as part of their retirement portfolio, while using the rest of their savings to invest and grow until the later years of retirement.

“On top of this, it is essential that customers are aware of ways to use their entire portfolio of assets to generate income in the most efficient manner. This can include making decisions that consider how their entire retirement collection might interact with taxes, striving to make their retirement savings as tax-efficient as possible.”

"It is important to remember that the size of a customer’s pension pot is not necessarily an indication of their overall financial wealth," points out Emma Byron, managing director for retail retirement income at Legal & General.

"The individual must take into account all of their financial assets when making retirement decisions. Unfortunately, there is no one-size-fits-all solution for customers, so we need to help them navigate these complex decisions."

This special report on investing for income in retirement looks at how advisers can help their clients to boost even the most meagre of pension pots and what to consider when planning a sustainable income in retirement.

The report qualifies for an indicative 30 minutes' worth of structured CPD. To read it, simply click on the image above and then complete the questions below.

eleanor.duncan@ft.com

CPD
Approx.30min
  1. Which of these is not the key when it comes to retirement income planning, according to Mr Selby?

  2. In an ideal world, Mr Selby says a what type of strategy should be followed to fund their retirement?

  3. Investors in funds in which IA sector "have been disappointed with their investment", Mr Cook claims?

  4. Is the following statement about equities true or false: "They tend to exhibit volatility, which is disconcerting to investors and can lead to behaviour which is dangerous, such as selling at the bottom of the market."

  5. For those with very small pots who want access to cash, what type of products is a great way to take their cash over a period of time, according to Ms Byron?

  6. Ms Vahey says what of pension freedoms?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Learn how advisers can help their clients boost their income in retirement and which strategies are best.
  • Understand how the retirement income strategy differs depending on the size of the pension pot.
  • Grasp whether the pension freedoms have had any impact on funding retirement sustainably.

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