Attitudes to work are changing and increasingly clients are looking to find flexible and bespoke solutions as they seek to plan for the future. 'Am I going to be ok in retirement?' is the most common question advisers are asked. Whatever stage of life clients are at, solutions are on hand to give clarity and assurance. But the need for quality advice is greater than it has been: rule changes often mean retirement strategies involve complex integration of numerous financial products. In this series we look at cutting edge solutions and show how advisers guide their clients on the journey.
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The changing face of retirement
Creating space to plan for the future
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Read: A VOTE OF CONFIDENCE
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Roundtable: Beyond the one-size-fits-all retirement
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THE CHANGING FACE OF RETIREMENT
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With markets no longer doing much of the heavy lifting to meet retirement needs, advisers and their clients have to explore other options. In this video, Richard Parkin, BNY Mellon Investment Management’s head of retirement, tells Citywire’s Amy Maxwell why using the same investment solutions for accumulation and decumulation may no longer work, and how he helps advisers shape an investment strategy that is fit for purpose whatever stage of retirement their clients may be at.
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Mission to improve retirement outcomes
For more information on retirement investing at BNY Mellon Investment Management please contact:
Richard Parkin, Head of Retirement Or visit the BNY Mellon Investment Management website
When Paul and Andrea Jensen turned 50 this year, they thought it was time they got serious about their future. Although they had big ambitions – early retirement and the purchase of a catamaran to sail to Paul’s native Australia – they had yet to put plans in place to achieve them. ‘We have lived well, travelled a lot and eaten well,’ says Paul, the head teacher of Sunnydown, a specialist school in Surrey for boys with autism. ‘Our finances have very much been directed towards our sons, with various music lessons, clubs and activities. We had never really focused on our financial future, assuming pensions would be enough.’ Paul has a modest pension entitlement from his brief membership of the QSuper scheme for employees of the Queensland Government. He moved to the UK 20 years ago and also has a British public-sector pension, as does Andrea, a teacher at Sunnydown School. Having started their teaching careers relatively late, however, they are playing catch-up, not least because Paul has set his sights on retiring at 55 – by which time he will have accrued only about 23 years of pensionable service. Andrea sees her career going beyond this and has her own aspirations. Their family home is currently provided by the school and, as idyllic as it is with their two dogs, three wallabies and four chickens, owning her own home in the UK is important to Andrea, to provide a base for their sons Seb, 19, and Mal, 17.
ground
Having sought advice from a mortgage broker, the couple were referred to Matthew Pescott Frost – owner of Suffolk-based Matthew Douglas – for financial planning advice. ‘It turns out that Matthew advises my father, who was also introduced by his mortgage broker,’ says Andrea. ‘Matthew took our details and discussed two main options for minimising tax and enhancing savings. The advice seems sound, with growth and benefits being realistic. Obviously, we would have wished for a magic wand but these don’t exist.’
‘The demand for retirement advice has never been greater, with an ageing population and falling IFA numbers, which means the rewards for good advisers remain attractive’
Investment writer
Jennifer Hill
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With a good wind behind them and the navigation skills of Matthew Pescott Frost of Matthew Douglas to guide them, Paul and Andrea Jensen are charting a course to early retirement.
For Pescott Frost, it was a relatively straightforward case of deciding what capital and income Andrea and Paul will need in five years’ time and deploying an adequate level of savings to tackle the shortfall. ‘Paul and Andrea have been very clear that they wish to retire early and head for Australia, with enough money to afford a boat and preserve their existing quality of life,’ he says. ‘They are concerned that they haven’t prepared properly to meet their goals but they are fortunate to have a high level of disposable income to address the problem.’ Building on the solid foundation of the couple’s guaranteed teacher’s pensions, Pescott Frost has recommended a strategy of saving into a combination of private pensions and ISAs to provide for the quality-of-life extras they desire. ‘By making regular monthly contributions into Sipps and ISAs, together with the additional five years’ accrual they will enjoy from their teacher’s pensions, with annual growth of around 6%, they should have sufficient tax-free capital from the pensions and equity ISA portfolios for the boat purchase, and supplementary private pension income to make up for the gaps in service caused by starting their careers late and retiring early,’ he says. ‘They will also have had the added bonus of significantly reducing their exposure to 40% income tax over the next five years and building pension capital outside of their estate and therefore free from inheritance tax.’ Plans beyond the catamaran voyage to Australia with time spent exploring on the way are less clear. The couple are undecided as to which country they will retire to permanently. ‘If Paul and Andrea choose to commit to the UK, then no doubt I will be advising as to how best to maximise Paul’s Australian pension,’ says Pescott Frost. ‘Would it be best to leave this scheme as it is or to consider a transfer of Australian pension accruals to the UK? Qualifying overseas pensions tend to have reciprocal arrangements with the UK system so this would certainly be an option. I suspect this is a conversation for the future.’
Catching the wind
For Pescott Frost, retirement planning is no more or less challenging than it was 30 years ago, but the nature of it has changed. ‘Information is so much more readily available and there is always downward pressure on charging while the cost of doing business increases, with far greater emphasis on regulation requiring more non-productive staff, consultants, fees and insurance in an increasingly litigious environment,’ he says. ‘On the positive side, the demand for retirement advice has never been greater, with an ageing population and falling IFA numbers, which means the rewards for good advisers remain attractive.’ Retirement itself is undoubtedly changing as attitudes to work change. In many cases, retirement is no longer an event but a gradual process of moving from earned income to investment income, requiring flexibility and understanding of a tax system that is never static. ‘Rule changes often mean retirement strategies are no longer just about pensions but involve complex integration of numerous financial products as clients juggle the need for tax-efficient income with a desire to preserve their wealth long after their death,’ says Pescott Frost. He considers it ‘always rewarding and a privilege’ to be trusted to advise on clients’ futures. ‘When you provide a service rather than a commodity, your clients are literally buying your promise and your knowledge to navigate the investment market and the tax system on their behalf – that you and your company will be there to navigate for the entire journey and will help them to achieve their objectives as painlessly as possible,’ he says.
Financial clarity
‘Rule changes often mean retirement strategies are no longer just about pensions but involve complex integration of numerous financial products as clients juggle the need for tax-efficient income with a desire to preserve wealth after their death’
‘I always tell my team that knowledge is a given and that clients invest in them and whether they can stand the thought of entertaining them in their front room every six months.’ In this case, the mutual fondness and respect are clear. Beyond the couple’s finances, Pescott Frost can find plenty to talk about with Paul, a keen fisherman with an interest in nature and wildlife, and Andrea, who completed her master’s degree in literature while working full-time as a teacher and until recently was a competitive ballroom and Latin dancer. ‘Paul and Andrea are delightful company and we have much in common, being of a similar generation and Andrea having grown up in the same suburban town as me during our formative years,’ says Pescott Frost. ‘I sincerely hope they remain clients of ours for many years to come.’ For the Jensens, the real benefit of Pescott Frost’s advice will not be realised until 2028. For now, they credit him with the clarity they have around what they need to do to achieve their goals. ‘This financial clarity is due to the insights provided by Matthew through his knowledge and experience,’ says Andrea. ‘Starting at 50 is not too late but having started at 30 or even 40 would have meant increased chances of financial security later in life. We will be advising our sons to start saving earlier!’
CEO, Matthew Douglas
Matthew Pescott Frost
Gaining
gaining ground
Five centuries of pensions
When economic conditions change to the extent they did in 2022, the ripple effects are felt across all sections of society. How these changes impact retirees – present and future – was the topic of a panel discussion hosted by BNY Mellon Investment Management in partnership with Citywire. In this video, experts from across the pensions community discuss what is driving the return of the annuity, the quest for retirement resilience, and the evolving and crucial roles advisers and providers play in navigating the new economic climate. Joining the debate were:
Beyond the one-size-fits-all retirement
Charles Walmsley: Editor, Citywire New Model Adviser (chair) Richard Parkin: Head of retirement, BNY Mellon Investment Management Michelle Lambell: Chartered financial planner, The Minister Partnership Rob Yuille: Head of long-term savings policy, ABI Steve Webb: Partner, LCP Kyle McClellan: Wealth manager, Maseco Private Wealth Tom Selby: Head of retirement policy, AJ Bell Michael Lawrence: Principal consultant, Bovill Consulting
‘I model what younger generations’ retirement income will look like with what they’re contributing now. That’s often the shock factor for them to say: “I can’t live on that!”’
Managing Editor, Citywire Engage
Amy Maxwell
2022 was the year that turned advice on its head, but the reckoning has been a long time coming. This was the consensus from panellists brought together by BNY Mellon Investment Management and Citywire to discuss the changing face of retirement. The debate, held in autumn 2023, saw experts from across the retirement community tackle everything from pensions freedoms and the need to rethink fixed income, to savings deficits and suitability. There is no one-size-fits-all retirement solution, the group concluded, and it’s going to take some substantial mindset shifts to ensure the UK’s retirees, present and future, are putting enough by and in the right places for their golden years to be comfortable. Kyle McClellan, wealth manager at Maseco Private Wealth, said one of the biggest shifts has been triggered by the rises in the interest rate cycle, which has affected the ability of fixed income assets to achieve clients’ objectives. ‘We’ve had the Tina problem over the last three or four years, where “there is no alternative” to equities for income was the norm because gilt yields and bond yields had been at 1% to 2%. There is now a need to change the conversation when a client says: “I don’t want any bonds in my portfolio because why am I going to accept a 1% yield?” You must illustrate with: “You have a requirement for income and there is the possibility the markets will not be as generous and we might face more volatility.”’
Experts from across the retirement industry address what needs to change to make pensions fit for purpose in a time of rapid change.
‘I can’t live on that!’ Why 2022 gave the retirement industry its reality check
The Minster Partnership
Michelle Lambell
Beyond highlighting the potential risks of a static asset allocation in decumulation, Michelle Lambell, a chartered financial planner at Dorset-based The Minster Partnership, said tougher conversations need to be had much earlier on in the accumulation phase. Younger generations are simply not saving enough, she said. ‘They have this mindset that their parents have a retirement with guaranteed income and final salary pensions, and that’s what theirs will look like. It takes quite a bit of talking to and showing them that’s not going to happen,’ she said. ‘I model what their retirement income will look like with what they’re contributing now. That’s often the shock factor for them to say: “I can’t live on that!”’ Lambell says it all comes down to financial education. The earlier younger clients can be persuaded to start paying into a pension because they can see exactly what it’s going to give them, the better. Richard Parkin, BNY Mellon Investment Management’s head of retirement, echoed Lambell’s thoughts on the need for clearly defined outcomes, particularly when clients move into decumulation. ‘From a portfolio construction, advice point of view, you move from trying to maximise return with a level of risk to having a much more specific objective,’ he said. ‘Then what you’re trying to do is achieve the return that’s going to deliver that objective with as high a degree of certainty and consistency as possible. That is quite a big mindset shift.’ That is why, he said, the market dislocation of 2022 was so important. Up until then, as Maseco Private Wealth’s McClellan alluded to, returns were much easier to come by. But now, ambivalence to the assets being held in a retirement portfolio could pose considerable risk to meeting return objectives. ‘Where 2022 caught people out was in using the same fixed income in their retirement portfolios that they were using in their growth portfolios. When you’ve got fixed income in 10% of your portfolio, perhaps it’s OK to have that much in fairly long duration. But when it’s 30%, 40%, 50%, you’ve got to think much more about what it’s going to do, and we saw the impact of that last year.’
Early doors
Doing nothing is an issue for Tom Selby, head of retirement policy at AJ Bell. ‘There’s a danger that automatic enrolment, which has been this fantastic tool that’s got 10 million-plus people saving for retirement for the first time, will have the opposite affect for people making retirement income decisions,’ he said. ‘The success of automatic enrolment could turn into an absolute disaster in retirement. Whether they’re buying an annuity, taking drawdown, doing mix and match, retirees need to make an active decision. They need to engage at some point. It has to happen.’ For Rob Yuille, head of long-term savings policy at the Association of British Insurers, the DWP review of how occupational schemes support members at retirement offers useful insight into improving engagement. ‘That review is critical for a whole range of investment decisions and the need for providers and trustees of occupational pension schemes to help people make decisions,’ he said. ‘But arguably, the most important use case is to treat those retirement decisions not as a one-off but on an ongoing basis.’ Yuille highlighted the ‘hundreds of thousands’ of people who have gone into drawdown without advice and was positive of the impact that the review would have on signposting them to an adviser. ‘These people might carry on in drawdown but at some point they might want to get a guaranteed income for the rest of their life. So providers’ ability to help people make that decision and to say without a personal recommendation that “this might be a good time to get a guaranteed income” is really important.’
A hiding to nothing?
Steve Webb, a partner at Lane Clark & Peacock (LCP) and a former pensions minister, said that while he is all for people making informed choices at retirement, sometimes it is just not practical. ‘I’ve listened in on phone calls when people ring up their pension company or pension provider saying: “I’d like to access my money.” The poor person on the phone goes through the script. I heard one lady say: “I don’t know, dear, what answer would you like me to give? I just want my money.” ‘That’s why I think it comes down to the D-word. There has to be a good enough default for most people, most of the time. Then by all means, let’s help people optimise.’ Michael Lawrence, principal consultant at Bovill Consulting, believed another review, the FCA’s Retirement Income Advice Review, will be positive for the industry as whole, serving to lift the bar for pensions education and ensure a steady supply of new customers. ‘There are enough people and pension customers for everyone based upon the FCA data recently published. I think ongoing advisory customers have gone up by 50% in the last five or six years, while the number of advisers has only gone up by 10%,’ he said. ‘There’s a big opportunity for other firms in the market as well. That’s why all of these different journeys, whether they’re guidance or advice in all its forms, are going to hopefully evolve and do an improved job in the space.’
D is for default
When mortgage and protection brokerage boss Simon Redler contacted his former employee Paul Stewart three years ago, he was looking for the answer to a question that had been playing on his mind: could he confidently retire on an annual income of £100,000? Comprehensive cashflow modelling provided an affirmative answer, and 58-year-old Redler, who lives in Hertfordshire with his wife Sandra, is now just a few months from retiring. ‘When I broached the subject of retiring earlier than planned with my wife, she was sceptical about whether it would be possible,’ says Redler. ‘I’d completed my back-of-an-envelope calculations and felt it might be manageable but it was only when Paul presented his report to us that we were able to feel confident that retirement was a possibility and not a pipe dream. It’s meant we’ve avoided the anxiety we’d otherwise feel.’ For Stewart, a financial planner at London-based Finura, the increasing sophistication of cashflow modelling over the past decade is one of the most positive developments in retirement planning. ‘“Am I going to be ok?” is the universal question financial advisers are asked, and cashflow modelling can provide a pretty comprehensive answer these days,’ he says. ‘We build detailed financial models that pull together all the different strands of a client’s financial life and then we stress-test it in every way conceivable. It’s far easier than it’s ever been for clients and advisers to understand how much they will need in retirement, whether they are on course to achieve it, and their options if not.’
A vote of confidence
‘When our adviser presented his report to us, we were able to feel confident that retirement was a possibility and not a pipe dream’
Simon Redler demonstrated his belief in former employee Paul Stewart of Finura– and came out with full confidence about his retirement.
Having collated details of his client’s assets – the expected proceeds from the sale of the couple’s business and their buy-to-let portfolio, as well as pensions and cash – Stewart created a Voyant report. From this he was able to plot the likely income generated from the investments based on various scenarios, including different rates of return and changes in inflation and interest rates. ‘Not knowing whether we could achieve our goal was the biggest challenge we faced,’ says Redlar. ‘But that was easily overcome as soon as the report was presented to us. We can review and alter the inputs as regularly as necessary, usually once or twice a year.’
One matter that Redler is still trying to get to grips with is trusting the process. The core of his retirement plan had once been his property portfolio but he is among a number of portfolio landlords – those who have four or more mortgaged buy-to-let properties – who have sold up in search of better returns elsewhere. ‘For a certain generation, buy-to-let was a retirement plan that offered capital increases and a near-guaranteed income,’ says Stewart. ‘It also had the benefit of being an investment that people instinctively understood, so they tended not to make some of the unforced errors that you tend to see people make with stocks and shares. ‘But the increasingly hostile environment for landlords – including increased capital gains tax, being taxed on turnover rather than revenue, lower tax breaks and a higher regulatory burden – means we’re having a growing number of exit conversations with large landlords.’ A challenging period for equity markets over the past three years has seen the proceeds from the Redlers’ investment portfolio decline in value. ‘Investment returns have not been brilliant since we onboarded Redler and Sandra’s assets,’ says Stewart. ‘This has particularly frustrated Simon as it coincided with him falling out of love with his large property portfolio and looking to be seduced by an alternative. ‘All clients understand there will be a mix of good and bad years, but they tend to understand this better when the bad years have been preceded by a number of good years. I hope that as investment returns improve, Simon will have the same confidence in his investments as he does in our planning.’ Another big wrench for Redler is exiting Prudell, the business he helped found in 1987. Based in northwest London, the directly authorised firm has 18 members of staff, among them one of his two grown-up sons. ‘Most business owners coming up for retirement are focused on maximising the value of their exit, and why wouldn’t they be?’ says Stewart. ‘But Prudell is Simon’s baby, his imprint on this world, and he’s been balancing the need for cash in retirement with the desire to leave the company in a strong position financially, not least because his son Ben is part of the management team.
Detailed data
Managing director, Prudell
Simon Redlar
Financial planner, Finura
Paul Stewart
‘“Am I going to be ok?” is the universal question advisers are asked, and cashflow modelling can provide a pretty comprehensive answer’
‘This is admirable but also highlights the important role of financial modelling as we’ve needed to reassure him that he can still afford everything he wants.’ At one stage, the company had a wealth management arm. This was how Redler and Stewart met and what instilled in Redler the importance of precision. ‘Aside from the financial instruments, the focus has very much been on the financial models,’ says Stewart. ‘Given Simon used to run a wealth management business, he really embraces the idea that the models are only as strong as the data we use, so the information I get from him is extremely detailed and comprehensive.’
Although the wealth management business was sold in 2017, Redler was keen to work again with Stewart, whose knowledge and integrity he valued. ‘I contacted him in September 2020,’ says Redler. ‘Since 2017, my finances had been managed by the firm that bought our wealth management department but I didn’t feel my relationship with that firm was particularly strong. ‘Paul is very approachable and explains a complicated subject in a way that even I can understand.’ For Stewart, retirement planning is both harder and easier than it has been in the past. On the downside, he reckons there is less certainty around the future of pensions than at any other point in his 16 years’ advising. ‘Clients rightly worry about future tax relief, potential means testing of the state pension and to what degree an incoming Labour government might undo things, like the recent lifetime allowance changes,’ he says. On the upside, more flexible working patterns have been ‘hugely helpful’ for retirement planning. At the same time, lower annual allowances have increased the focus on using a wider range of tax wrappers, giving greater opportunities to pay less tax in retirement. Looking ahead, Stewart wonders if annuities will become a larger part of the retirement toolkit again: ‘After years of terrible rates, they could be quite difficult to rehabilitate in the minds of clients.’ As for Redler’s retirement journey, it is just about to begin. ‘Simply put, I’ve been preparing him for retirement,’ says Stewart. ‘While I took over the management of his pension and ISAs, the main work has really been in giving him confidence that he can walk away from his business and live the life in retirement that he deserves. ‘Simon is a former boss of mine and frankly one of the people I admire most in business. I’ve learned a lot from him and it’s been extremely rewarding to be able to give something back. ‘I’m really looking forward to seeing how retirement changes the nature of our relationship. He is one of the hardest-working and most driven people I’ve ever met and it’s going to be interesting to see what he wants to do next in life – and to play my part in helping him live it.’
Life after work
For Rob and Wendy Gale, retirement has been less a case of potluck and more a case of pot planning. Having amassed several pension pots during their careers, the couple wanted to know how these could best be tapped to fund a retirement exploring the globe. In seeking an answer to this question, Rob, 60, and Wendy, 58, sought advice from adviser Nick Burt, a chartered financial planner and partner at London-based Partners Wealth Management (PWM). Rob first met Burt after being asked for pension advice by colleagues who were approaching 50. His then-employer – a big bank – arranged an introduction. ‘After Nick’s initial presentation to all employees, I asked for a one-on-one meeting to look at the options open to me,’ says Rob, former director at the bank. ‘I had good knowledge of other investments but didn’t have the skillset I now have around pension and retirement planning.’ Rob wanted to structure various legacy pensions to provide a flexible income in retirement that could, in the event of his death, be passed to Wendy, who had worked as a high-level teaching assistant and, most recently, a receptionist at a private hospital, and their two adult daughters. He also wanted to make the most of his high salary and bonus in the last few years of work by saving as much as he could tax efficiently into his employer-funded defined contribution scheme. ‘I’d always paid into my pension from my salary and bonus but wanted to increase this and sacrifice more salary and bonus given my tax position. I wanted to retire and travel a lot while I was relatively young.’
‘I like clients to have different portfolios and portfolio managers in decumulation to add diversity and protection’
Consolidating a number of pensions in the accumulation phase made sense for Rob and Wendy Gale, but in decumulation their adviser, Nick Burt of Partners Wealth Management, is still managing lots of pots.
Burt had numerous discussions with the Gales about their lifestyle, plans for retirement and how much money they would need. He addressed how best to maximise their savings in the final few years of work and how pension withdrawals in retirement could dovetail with property income and other investments as tax efficiently as possible. ‘I felt confident I could retire in my late 50s, achieve the retirement we wanted and still leave our children a good legacy,’ says Rob.
Having worked for nearly 40 years – 34 of them in the banking and finance sector – Rob’s initial objective was to know what he should do with several legacy pensions. ‘Nick was very patient and gave me sufficient information to simplify the situation and make the decisions easier,’ he says. Although most of Rob’s pension assets have been consolidated into a Sipp, that doesn’t mean the investment approach is homogenous across the portfolio. While much of the focus for product providers has traditionally been on the accumulation market, they are increasingly innovating to better cater to investors in decumulation through multi-asset, volatility-managed and income-oriented strategies, for example. Independent advisers such as Burt have the run of the market. ‘In the decumulation phase, it’s useful to hold different portfolios that can move in different directions, depending on market conditions,’ he says. ‘So when you draw on your fund, you can try to avoid crystallising losses. ‘You can also have different buckets for different timescales, with a higher-risk, longer-term bucket for assets you may not touch for 10-plus years, which often takes a more passive and low-cost approach, and a lower-risk bucket for assets that may be needed for withdrawals in the shorter term, often with active management and higher fees.’ Rob’s Sipp is invested in four investments with contrasting portfolio managers. ‘They all have slightly different mandates and views, with one targeting returns that are contrarian to equities, so offer a degree of protection if markets fall,’ says Burt. ‘I like clients to have different portfolios and portfolio managers in decumulation to add diversity and protection.’ While Rob stopped working entirely at the end of 2020, Burt sees more and more people retiring gradually. Whatever shape retirement takes for a client, it increasingly means deciding how best to access pension assets alongside other savings and investments. ‘Advice must incorporate the gradual use of pension benefits, and this can involve various strategies, including the deferral of defined benefit pensions, the use of tax-free cash to supplement taxable income, and the use of different tax structures or pots to create a tax-efficient income plan,’ says Burt. ‘Most clients pay little tax in retirement if they decumulate with proper planning, and at PWM we have tax-optimisation tools and cashflow modelling software that can help achieve that.’
Different directions
Chartered financial planner and partner, Partners Wealth Management
Nick Burt
Financial planner, Finura Partners
The advice for the Gales focused on how best to draw on Rob’s large Sipp in a tax-efficient manner to generate a high level of income in the early years. He is making regular taxable withdrawals from his pension, which are supplemented with occasional use of his tax-free cash entitlement. Wendy, meanwhile, is using her personal allowance against a smaller defined benefit pension and income from a property portfolio that is predominantly in her name. The properties and her pension provide the couple with a relatively secure level of income. ‘They have a good balance of secure income to cover most of their essential expenditure and flexible income from the Sipp to meet discretionary spending needs,’ says Burt. ‘There are also further income streams to come from another secure pension starting at 65, and also their state pensions. The planning aim is to make sure they never run out of money and can leave much of the estate and their pensions to their daughters.’ To this end, cashflow modelling plays a crucial role. ‘It really helps clients understand the planning and gives confidence the plan is achievable,’ says Burt. ‘Many clients have a higher level of spending in the early years of retirement and then this reduces as they get older and are less able to travel. Needs can spike again at the end of retirement if care is required. ‘A model that can look forward 30 or 40 years helps to demonstrate the shape of income that can be achieved and how invested assets can provide flexibility around secure and fixed income streams.’ For now, Rob and Wendy are enjoying the fruits of their labours. With foreign travel curtailed during 2021 due to the pandemic, they decided to tour the UK – from Scotland in a motorhome to the Oxford Canal on a boat. Holidays in 2022 included two trips to Cape Verde, a cruise around the Norwegian fjords, their 22nd visit to Disneyland Paris with their daughters, and a trip to New York. So far this year they have cruised the Caribbean, visited Canada and Alaska and spent time in Wales, the Lake District and their holiday home in north Yorkshire. They have many more holidays planned. ‘Our plan is to go abroad every six weeks,’ says Rob. For Burt, Rob and Wendy are a good example of taking advice to have the confidence to retire early and do what you want. ‘Too many people work for too long and are too cautious,’ he says. ‘Seeing Rob and Wendy relish the first few years of retirement with so much travel and enjoyment makes the job worthwhile.’
Shape of income
Although investment returns have been meagre in recent years, it’s the longer-term objectives that are most important. ‘The [investment] return hasn’t been as expected yet due to the economy, but while I check the fund value every month, we trust Nick 100%,’ says Rob. ‘We will get to a point where we won’t want to travel as much but the Sipp will continue to grow as we spend less money. ‘We also know it falls outside of inheritance tax and is for our family. We hope it and our other investments give our children a nice retirement too, and our grandchildren (should we become grandparents) a start in life. This is a long-term plan.’
Long-term plan
pots
Lots of pots
The adviser retirement toolkit
Advisers’ best tools for balancing investment growth and capital preservation in retirement.
‘Generating sufficient income in retirement hinges on a delicate balance between investment growth and capital preservation. Although adopting a conservative investment strategy will provide greater security, it also exposes clients in decumulation to the risk that their retirement savings fail to keep pace with their income requirements. ‘By taking a client’s income needs and risk appetite into consideration, advisers can create a bespoke investment plan using a well-diversified portfolio of investments. We would typically achieve this for our balanced clients by using traditional multi-asset funds and managed portfolio services, and in most cases reducing the level of investment risk as they get closer to retirement. ‘For more cautious investors with lower risk appetites, we often consider using funds with smoothing features and/or larger cash balances. This strategy aims to limit investment risk, providing more nervous clients with greater peace of mind.’
Investment risk
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Görkem Gökyigit
Lubbock Fine Wealth Management
1
Tool: Multi-asset strategy
‘Running out of money is a concern for clients in decumulation. To assuage those fears we produce a lifetime cashflow forecast. This projects income, savings and spending typically to age 100 – beyond Office for National Statistics predictions – to provide a strong safeguard against longevity risk. ‘Based on growth and inflation assumptions, we illustrate when retirement income will commence and how spending may fluctuate over time. A common retirement-planning scenario sees those retiring around age 60 facing an income deficit until state pension age. This provides a great planning opportunity for us to generate sufficient tax-efficient income through personal and dividend allowances and capital gains tax exemption. ‘In this high inflationary environment, cashflow forecasting also helps clients to understand how inflation can affect their financial plans and underlines the benefits of a diverse investment strategy to support capital growth and ultimately legacy planning.’
2
Alice Wilkinson
Financial Management Bureau
Tool: Lifetime cashflow forecast
Can the investments generate the returns needed to sustain the income?
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Will the client run out of money before they die?
Longevity risk
‘The game-changer for me in managing annuity risk is secured lifetime income, recently launched by Just Group, which offers guaranteed income free from sequencing risk and uncorrelated to other assets in a typical drawdown portfolio. ‘Like conventional annuities, it is built upon the long-established and proven concept of pooling longevity risk with other retirees, which means it can generate higher income than conventional bonds as the income assumes bond-like returns plus mortality credits. ‘Our typical approach for a 60/40 balanced portfolio would be to split the fixed income portion equally between conventional bonds and secured lifetime income. The higher income generated on the latter allows the withdrawal rate on the remainder of the drawdown portfolio to be lower. ‘Several platforms have adopted the concept, which is just one way in which providers are innovating to help advisers manage decumulation risks.’
3
Tom Munro
McHardy Private Wealth
Tool: Secured lifetime income
Will annuity rates get worse as the client gets older?
Annuity risk
‘Early losses prior to or in the first few years of decumulation can have a much greater impact on total returns over the whole decumulation period than losses that occur later. When investment values are low, income withdrawals exaggerate the impact of the downward movement in the value of the portfolio and dampen the effect of any growth. ‘One way to help mitigate sequencing risk is to split the portfolio into one or more defined sub-portfolios with different risk profiles, sometimes known as the “two pools approach”. One part of the portfolio contains enough in assets with very low volatility, such as cash or near cash, to cover estimated expenditure for two or three years. That allows the value of the portfolio to crash without having to draw on the affected element at unusually low prices until it has recovered.’
4
Anita Wright
Bolton James
Tool: Two pools approach
How can the client be safeguarded from a big fall in markets?
Sequencing risk
‘Given rises in the cost of living, inflation risk is something we consider very carefully for clients in decumulation. To some extent, it is a risk we accept rather than manage. ‘Our current advice is to move three years’ income into a cash fund to preserve the value of the capital that is required in the near future. Even with yields of 4-4.5% on funds holding a mix of short-term bonds, gilts and money market instruments, this income pot will likely lose value in real terms. Cash drag is a problem but we view inflation risk as the lesser of two evils. ‘With the income coming from the cash fund, we can direct the residual fund towards longer-term growth in line with the client’s attitude to risk, which can help mitigate inflation risk on the total value of the pension fund.’
5
Joe Sanders
Informed Financial Planning
Tool: Investment growth
How can the client’s income keep pace with rising prices?
Inflation risk
LONGEVITY RISK
ANNUITY RISK
SEQUENCING RISK
INFLATION RISK
Thinking differently is paramount for today’s retirees and their advisers. Amid increasing longevity, higher inflation and greater volatility, existing decumulation strategies are increasingly under question, according to Newton Investment Management. ‘We've recognised for the past couple of years that we’re very much in a new market regime – one that we’ve not seen before,’ says Mitesh Sheth, chief investment officer for multi-asset. ‘We tend to characterise it as a regime that is defined by deglobalisation, decarbonisation and divergence.’ In such an environment, equities and bonds might not behave as they have done in the past and core passive exposure to asset classes might not deliver real returns. For Newton, this new market regime necessitates high-conviction stock selection, dynamic asset allocation and robust risk management – and combining these with a clear focus on sustainable investing as we transition to a low carbon future. ‘That’s a different future we’re facing now and we might need different solutions – in fact, we say you will need different solutions for such a future,’ says Euan Munro, chief executive officer of Newton.
Job role
Name
How Newton is helping clients to adapt
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