What the Class of 21 can teach you

A recent Standard Life Aberdeen survey of people retiring in 2021 indicated that two thirds (66 %) of them would exhaust their pension savings before they die, based on the average they planned to spend in retirement per year vs the amount of savings they had put in place.

The cohort, identified as spending on average £29,000 per year now, indicated that they planned to spend on average £21,000 per year in retirement. Based on a 30 year projection of life expectancy, this would require them too have accumulated savings of £390,000 at minimum on top of their state pension entitlements. The average actually saved was around £366,000, with a third admitting they had less than £100,000 saved.

Time and again we see people who have failed to seriously think about how they will maintain the lifestyle they desire in retirement. Many factors play a part in this, including a simple lack of desire to think about ageing and mortality, a misconception of how pensions work, and an increasing trend for people to simply assume they can work longer.

But life seldom runs according to a strict plan, and many of those looking to retire in 2021 are doing so earlier than they had intended, due to the impact a global pandemic and a badly fluctuating economy have had on their career prospects. One in ten of them are intending to sell their home and/or downsize in order to try to fund their retirement plans. Having worked their entire lives, they are now looking at many compromises just in order to be able to fund the basic, bare minimum level of comfort as they finally retire.

What can this teach those looking to retire in the future? First of all, always have a realistic idea of what’s required. The earlier you sit down and plan out exactly what sort of life you want to have when you finish working, the earlier you’ll have an idea of how much that will cost, and the better chance you’ll have of reaching that funding target.

Don’t rely on your state pension to ‘tide you over’. Don’t make the mistake of assuming you’ll be able to simply work longer or downsize your home when the time comes. The economy fluctuates in big and small ways constantly, and if you happen to reach the standard retirement age at a time of recession, or as now, a pandemic, you may find that working longer is not an option, and selling your home is harder, impossible, or simply won’t yield the necessary returns.

Your future is the most important thing you can ever plan for – why leave it to chance? SF

Don’t wait for “someday” to become “today”

Planning for your retirement is one of those things that’s easy to put off. When you’re in your thirties, retirement seems a whole lifetime away, and there are so many more immediate concerns in your life that it’s easy to say ‘I’ll get to it someday.’

But retirement planning isn’t something you do once and forget about. Done properly, it’s an ongoing, organic part of your life, something to which you’ll return again and again to ensure that everything is in place. After all, life isn’t static and neither are you, so why should your financial plans be?

Circumstances change. That home you bought might become too small or too big, too remote or too central. Your career might shift dramatically in an ever-changing marketplace. Your children might go to university or decide to travel. Then there’s the things that none of us wants to think about. Something which shifts your ability to work in your chosen career or even at all. Health is something we often take for granted when it’s good, and then regret doing so when it isn’t.

There’s no way of course, to prepare for every eventuality. But there are ways to make certain things easier. One of those ways is in arranging a Power of Attorney, which should be a standard part of all retirement planning. Whether it’s through a life-changing health condition or simple old age, there is always a chance that at some point in your life you may be unable, temporarily or permanently, to make your own coherent decisions, and will need someone to do so for you. If that happens, you want to know that your loved ones will be secure, and that the decisions being made on your behalf are being made by someone you trust to act in your best interests.

It may seem like something you don’t have to worry about now, but consider this story just last week in the Mail Online. Derek Draper is 53 years old, and Covid has left him on life support for over a year. It is unclear whether or to what extent he may recover. His wife, the television presenter Kate Garraway has told of the immense emotional toll the experience has taken on her and her family. ‘I have tried to sort of wake up from that and think about the future. But nobody can tell you what the future is.’

No matter who you are, how old you are and how successful you may be, life can shift in the span of a heartbeat. There’s no way of ensuring that this will never happen, but you can try to ensure that you’re as prepared as possible for if it does. At the worst, it’ll be the life preserver you didn’t need. And how many people expect the ship they’re on to sink?

Being Smart Enough to Know what you Don’t Know

Neil Woodford went from hero to spectacular zero after his investment fund collapsed, leaving many inexperienced investors facing huge – in many cases life-altering – losses.

Other blogs have gone into greater detail elsewhere about the whole saga and what it says about regulation, the FCA and the way in which such funds are able to operate, but what we want to discuss here is the harsh reality which lies at the rot of many of the issues – that a great number of the investors in Woodford’s fund were simply too inexperienced to have been there in the first place, their attitude to risk having not been balanced against considerations like their capacity for loss – it’s all fun and games until t he fund starts to underperform and everyone wants their money back.

But to those who would react to such observations by comparing them to victim blaming, we simply say this – nobody is saying that these investors were stupid, but they were misinformed. The current state of regulation and the pensions market means that they were still able to invest in a fund that was clearly unsuitable for them, and in which many found themselves trapped after the fund was gated, following a surge of withdrawals as profit warnings were issued and investors got cold feet.

Had those investors instead approached a professional adviser and been given personalised, individual advice, they might have elected to make different decisions and invested in different funds more suited to their whole risk profile. Alternatively, they may have been better informed as to the likely trajectory and fluctuations of a fund like Woodford’s, resulting in fewer panicked withdrawals and possibly the whole precarious state of affairs being avoided.

Either way, as the old adage goes, being smart includes being smart enough to know what you don’t know. Very few people are experienced or knowledgeable enough to make sensible investment decisions with regards to their retirement planning that will both set up the retirement they want while avoiding the risks that they don’t. The perceived expense of such advice – when compared with the fees of entering a fund like Woodford’s – soon reveal themselves to be the smart investment when you aren’t scrambling to get yourself out of a fund that you fear may wipe out your retirement fund altogether.

As another adage goes, it’s better to be safe that sorry. Safe doesn’t need to mean dull, or conservative, but it does mean that you’ve taken the most appropriate advice for your own situation, and who can put a price on the peace of mind that could deliver, especially when you consider the alternative?

How do you solve a problem like pensions?

As per our previous article, research indicates that nearly three quarters of retirees are currently on course to run out of money in retirement. But what are the main issues causing this “sleepwalk” towards pension poverty, and how can they be addressed?

In our experience, some of the main issues are:

  • Clients’ perception of financial advice – either they do not grasp the potential costs and are frightened off by them when they find out, or they simply fail to see any value in the advice itself, feeling they may do better on their own.
  • Procrastination – we see a lot of clients approaching financial advisers much later in life, in their mid-fifties or later, by which time it can often be too late to realistically create properly tailored solutions which meet their requirements. This can often then reinforce their perception of financial advice as useless to them.
  • An overwhelming number of options being offered online and in the marketplace can seem paralysing to clients with little to no knowledge, leaving them paralysed with indecision, often ultimately leading to them taking no action at all.

Of course, identifying issues like these is only the first step in fixing the problem, and it is arguable that without a substantial cultural shift in both society as a whole and the industry in particular, that real systemic change is impossible. It falls then to advisers themselves to be the ‘difference makers’.

With regards to fees, it is often tempting to offer clients a ‘free initial consultation’ but this can devalue the advice available in the eyes of a client, and will often lead to many clients taking the ‘freebie’ and deciding they can do the rest themselves.

Until advisers learn to value all of their time, it seems paradoxical to expect clients to do the same. We should lead with a fee based conversation on the time and effort required at that initial meeting, and be sure to make a discussion of our ongoing fees a part of that initial session.

The life-insurance industry often likes to use shock and awe tactics to inspire people to take their products – it is after all difficult to persuade the average person to part with money for something the benefit of which they themselves will literally not live to see. However, we could learn some lessons from their lead. People don’t like to focus on uncomfortable subjects like ageing and retirement until absolutely forced, and a realistic appraisal of how difficult their lives could be in retirement without adequate preparation might help motivate them. This should be laid out in terms to which they can relate – less ‘imagine relaxing on a sunny beach when you have finished working’ and more ‘what will you do if you’re retired and don’t have enough money to pay the mortgage? What if you are unable/unwilling to downsize? What if you can’t pay the bills?’

People need to be strongly encouraged to confront the reality of a pension shortfall rather than some idealised picture of what their golden years could look like if we are to get them to take the issue seriously in enough time to make a difference. This will also help with the first point – if people see the urgency and need in being prepared, they will see the value in paying to be so.

The vast array of options and choices put in front of consumers who have received little actual education in what any of it means, coupled to the poor understanding of Pension Freedom means that financial advice is actually more important than ever, and it is down to advisers to convey that message. We should take the time to study the general priorities and values of our particular target demographic, identify the smaller number of choices which might be most appealing to them and communicate those options to potential clients clearly, constantly and concisely.

No one adviser can change the entire course of the pensions market, but nor can we expect the public to simply be shaken awake by one or more studies. People deal in hard facts which impact their own lives and comfort. Now, more than ever, it is urgent that we take the time to identify what those are and help clients to act accordingly, before it’s too late.

You’re not getting any younger. Now for the bad news…

A recent report by The People’s Pension showed that as many as three quarters of those with a pension are ‘sleepwalking into retirement poverty’.

Since the Pension Schemes Act in 2015 granted stakeholders more freedoms in how they accessed their pension pot, many have made poor decisions based on a lack of expertise and a reluctance to spend potentially thousands of pounds on ongoing expensive pension advice, the report found.

Other key signals that may be on course for misery when they hit retirement were:

  • Savers putting off planning for the future – just one in ten were found to have detailed plans for their money
  • Only one in twenty having made any consideration of how inflation might impact their savings
  • A general assumption across that board that they would not live to 100, despite statistical and medical evidence suggesting one in ten of those currently aged 65 will do just that.

The report found that most savers were going ahead and ‘doing their best’ on their own in terms of financial decisions relating to investment of their pension money, because of a fear of expensive advice, and that the decisions they made often appeared ‘illogical and irrational’.

From next month, a change means that those putting pension money into drawdown without taking any financial advice will be offered an investment option suited to their circumstances by their pension provider, but this really isn’t a substitute for proper planning and advice, and is likely to be a sticking plaster on what is a massive, industry-wide problem. It is highly unlikely that those whose funds are due to run out while they are in retirement would be able to sustain the sort of lifestyle they likely hope for on just the state pension, and may even have to delay or stop their retirement as a result.

It’s never too early to start thinking about getting proper advice on your retirement planning, but it’s also never too late either – none of us is getting any younger, and the better prepared you are for what comes next, the more likely it will fit your expectations.

Seymour Financial