Earlier this week we hosted our event Managing Income in a Post-Pension Freedoms World. It was an opportunity to DISCUSs the issues advisers, providers and retirees face as a consequence of Pension Freedoms legislation.
Did you know that the most populous age group in the UK today is aged 51? In the next five years the Pension Freedoms rules will face their biggest test as nearly one million people approach the point at which they could gain access to their pension savings. A frightening thought.
To DISCUSs the issues and challenges we invited two guest speakers, Gregg McClymont, Head of Retirement, Standard Aberdeen Investments and Abraham Okusanya, Founder and Director, Finalytiq to deliver short presentations. They were then joined on stage by Harry Taylor of Harry Taylor Consulting and Peter Toogood of The Adviser Centre for a lively discussion and debate.
Below is a summary of six insights we gleaned on the day (stay tuned for our Income in Retirement whitepaper, which we will release over the coming weeks capturing key points raised at the event).
1. Pension ‘freedoms’ are the beginning, not end of Government pension changes. Pensions represent a large percentage of the public purse, 20.6% of the government’s total £750bn expenditure (more than NHS spending which accounts for 18.7%). When you consider this outlay – and that it is increasing over time – and then overlay demographic factors taking account of issues such as longevity, it goes without saying that we will continue to see further changes in pensions.
2. Sweden hasn’t seen any changes to pensions legislation for 23 years. This may sound hard to believe, although there is a very good reason for it. The government cannot change the pension rules without cross party agreement. Staggering. While no doubt this brings stability, to me it begs the question: given there haven’t been any changes in more than two decades, could they be missing out on innovation in this area?
3. Capital should not be considered ‘sacred’ when planning for income in retirement. The vast majority of retirees will need to dip into their capital during retirement. Sometimes it may even make sense to draw on capital in the early years. This shouldn’t be seen as a ‘bad’ scenario. The objective for all of us is to spend our last pound on the day we die and then have the cheque to the undertaker bounce! (What a great analogy).
4. “Target date funds are the work of the devil” Abraham Okusanya. Research has shown that as a client draws nearer to retirement they should not dial-down their exposure to equities. Indeed, clients that do so are at risk of not meeting their retirement income goals. The risk of not taking enough risk to generate required returns is a massive issue for retirees (this concurs with research from 7IM on this subject). Compliance departments also don’t help in this regard, as dialling up risk is considered too ‘risky’.
5. We shouldn’t use the term income drawdown, ‘investment’ drawdown is a more appropriate label. One of the biggest challenges of Pension Freedoms is turning the traditional ‘saver’ mind-set into an ‘investment’ mind-set. Those who are used to saving, putting money away for the future while at the same time receiving their monthly pay check need to be educated on the risks of investing and the fluctuating nature of taking income from their investments. Financial education is imperative.
6. The best income solutions for clients in retirement are created by financial planners. During our DISCUSsion, the question was raised (by a financial adviser): “How are providers addressing the challenges of income in retirement? We haven’t seen any new products come to market”. The response was clear – the best solutions DFMs are seeing are those created by advisers, using holistic planning and cash flow modelling.
Stay tuned for further updates on this topic, including our whitepaper from the event.
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