Why boosting retirement income is an issue for clients

Not least because a recent study by comparison site finder shows that one in five adults believe that they only need £3,333 per year for their pension pot, which is drastically below the current state pension of £8,767,20.

So what are the problems faced by those nearing retirement? 

Cost

Udit Garg, head of wealth management at Sun Global Investments, highlights how most people underestimate the costs associated with retiring. 

He adds: “This is concerning as it shows a lack of planning and understanding on the retirees part and could result in failure to cover costs such as bills, mortgages and other essential elements they will need to pay in order to live out their remaining years as desired.”

Ricky Chan, chartered financial planner and director at IFS Wealth and Pensions confirms the tax implications of pensions makes cost a key concern for those due to retire.  

“Pensions and retirement income planning are complex and mistakes can be costly – for example, retirees will need to consider tax implications of drawing their pensions, whether or not to buy annuities, how any funds in drawdown should be invested and what a sustainable level of income for them would be.”

Inability to work longer 

Helen Morrissey, pension specialist at Royal London highlights that while some people will continue to work for longer, some may not be able to due to health constraints. 

She says: “If they find there is a shortfall then it can be too late to save enough money to make up the gap and while some people will be able to continue working, others may be unable to due to health issues or a shortage of suitable roles.”

Ms Morrissey adds that this is often exacerbated by the fact that “many pension providers only start sending out wake up packs six months before the customer’s retirement date”. 

This is why she says Royal London has begun sending out these packs five years before retirement to customers to help people commence the process of thinking out how their retirement will shape out and ensure they have the finances to make this happen. 

Fiona Tait, technical director at Intelligent Pensions, confirms this view and highlights how younger generations may have unrealistic expectations fuelled from the retirement benefits received by older generations.

“People often build up an unrealistic picture of retirement based on previous generations of their own family," she says. 

Increases in life expectancy, changes to workplace and state pension arrangements and different economic conditions means people retiring now have to save much more than their parents did in order to provide the retirement they thought they would have, according to Ms Tait. 

She adds: “For some [working longer] is not an option, perhaps due to ill health or family responsibilities and the result is having to survive on considerably less income than they are used to and/or would like to.

“This is why we strongly support the idea of a mid-life MOT, ideally when people are in their forties, which gives a realistic picture of their future retirement as well as the time to do something about it," Ms Tait explains. 

Helping clients understand the essentials 

Mr Chan says many people are victims of “delayed gratification" when it comes to saving. 

He describes this as the act of people not being able to see the benefits of being financially disciplined with savings and perhaps incorrectly believing they are too far behind to start saving.

Mr Chan says this means that people often delay their savings into pensions and investments, losing out on compound growth over the years and making it more expensive to “catch up” when they are older. 

Ms Tait says clients need financial advice to navigate their way through the many decisions they need to make regarding the level of income they need.

She stresses that guidance is needed to also assess the most tax-efficient way of accessing the income and ensure it lasts for as long as it needs to. 

Mr Garg points out that millennials are in greater need of financial guidance as they are more likely to be renting homes compared to previous generations, potentially leaving them less money to save for retirement. 

He adds: “Therefore, it is important that people have more guidance and understanding in the ways they can boost their retirement. This can include state benefits, diversifying and maximising employer’s contributions. Once there is a better understanding, people will likely find it easier.”

Martin Jarvis, associate consultant at Mattioli Woods warns that low annuity rates can force individuals into flexi-access drawdown and can lead to pots being prematurely exhausted should individuals not get proper financial advice. 

He highlights how some individuals may simply need assistance understanding the “myriad” of different rules that have developed over time.

He adds: “From how much tax free cash is available, to how to draw an income, as well as the type of pension they may have - defined contribution or final salary – which may have also undergone rule changes unbeknown to the client. This all becomes part of a long term plan to meet a client’s needs.” 

saloni.sardana@ft.com