The 1 in 3 chance your pension might fail you, and what you can do to fix it.

A recent study by the International Longevity Centre (ILC), in conjunction with Standard Life, suggested a stark reality for those born between 1965 and 1980 – also known as ‘Generation X’. That reality was that around 33% of this generation have ‘inadequate’ provisions for their retirement, meaning that through a lack of planning, inadequate savings strategies and general neglect, nearly a third of a generation not that far from retirement are staring down the barrel of not having enough money to support themselves in it.

Generation X finds itself in a unique position in the pensions market, generally having entered the workplace at a time where final salary scheme pensions were a thing of the past and auto enrolment hadn’t yet arrived. This, combined with the woeful lack of clear education on the subject and a general reluctance to consider the topic has led us to the situation we now find.

But doom and gloom isn’t really our style. Many publications have already highlighted the desperate plight of this forgotten generation of upcoming retirees, but here at Seymour we are focused on solutions, not problems. If you think that you may not have your retirement plans in order, or even if you just fancy checking them out, here’s out top ten tips to give yourself a Pension Detox and really cleanse those finances:

  • Remember it’s never too late! Whether you’re already picking out post-work life hobbies or retirement is a distant speck on the horizon, the only wrong action is inaction – get on it now!

  • Check your life insurance policies: are they still fit for purpose? Are they up to date with your current mortgage/s and other debts? When were they last reviewed? Are they written into trust? It’s the most basic step on the financial planning ladder but even those who have policies often fail to review them, meaning that they become an expensive and inadequate liability instead of a core protection.
  • Make a comprehensive review of your month to month income, expenditure and savings. Be honest with yourself; are there areas in which you could cut back if you needed to? Extra money found here (changing a phone plan, making your social life cheaper, examining your transport options) can all be put towards savings and helping to beef up that pension pot
  • Consider your tax reliefs – if you’re a higher rate tax payer for example, extra pension contributions attract tax relief at 40%, meaning more money in the pot.
  • Consider Individual Savings Accounts (ISAs) for yourself and (if applicable) your partner. Even if not working, you can contribute £20k a year into an ISA which is not limited to earnings like a pension contribution. This means that in households where one partner is a houseperson, you can effectively double the amount you can put in a tax-free environment to £40k.
  • Check your state pension forecast. For starters, you could make up extra years where you haven’t built enough. The state pension is a guaranteed index-linked pension for life. To put that in context, if you were buying an annuity to the same level it would cost you over £300k.  For married couples state pension income as a household will reach over £18k a year before the need to take pension income from private provisions, so it’s not to be sniffed at.
  • Check your work place pension contract if you have one. If you increase your contributions does your employer increase theirs to match you? If so, it’s effectively money for nothing and can have a big effect on your overall pension pot.
  • Think in detail about your income needs into retirement, and how you will realistically meet them. Are you planning to retire in full at state retirement age, carry on working full time until a later date, or get a part time job following retirement that may provide a small additional income? Regardless, it’s important to cashflow your retirement to establish what level of shortfall if any you have. We do cashflow planning as part of our wealth MOT so by following our advice, you can make an informed decision based on realistic estimates not only of what you need but how best to get there.
  • Stress test your retirement. It’s always best to plan for the worst even as we naturally hope for the best. You may think you have just enough to retire comfortably, but what would happen if there was a financial crash, a global pandemic or a personal change of circumstance? Could your plans survive this kind of external pressure? At Seymour we cashflow such events to see if your plans remain realistic in these scenarios, building in the sort of resilience that will help ensure you won’t be caught off guard at the worst possible time.

  • Explore your options realistically if you do establish a shortfall. Perhaps you could save more money now, retire at a later age or accept a lower income in retirement. Fluidity and adaptability are crucial when it comes to long-term financial planning, especially when it comes to retirement. Just remember to be honest with yourself about what’s possible versus what’s realistic – it may be possible to work until you’re 80, but is it realistic in your chosen field?

While this is no magic solution, by following these kinds of steps and being honest and realistic with yourself about what you can have, as well as what you want, you will avoid the pain the media insists is headed towards the ‘forgotten generation’ as you near retirement. For more information and to make a start on those plans, call us today. SF

Adjusting for Loss – why Risk vs. Reward aren’t the only calculations relevant to your retirement planning.

A recent piece of market research carried out by CoreData has highlighted a trend in younger investors which industry experts have labelled ‘deeply concerning’. The study of 400 retail investors found that, of its ‘millennial’ (aged between 25 and 40) respondents, 40% would add cryptocurrencies to their pension investment portfolio given the chance.

Of course, Cryptocurrencies are big news at the moment – Bitcoin and Dogecoin are both often in the financial headlines, both due to stories of extreme growth as well as large swings – it’s a highly volatile but potentially lucrative market.

That volatility and the fact that cryptocurrencies remain – at this point – unregulated, mean that they are not directly available to pension funds, and the Financial Conduct Authority has already expressed concern at the risks posed to retail investors by them.

With a labour force very well aware of the disadvantages it faces compared with previous generations – the lack of final salary pensions, the depressed nature of a market which has yet to fully recover from the 2008 crash and which is currently troubled by the ongoing Covid crisis – it’s no wonder that savers, especially millennials, would be looking for a potentially fast-growing asset, especially a countercultural one like cryptocurrency.

However, while you might think that your attitude to risk is the only thing that matters when planning your investment strategy, you also need to think about the equally important capacity for loss, also known as financial resilience.

At Seymour, we take all of our clients through a comprehensive risk-assessment process, which examines both these elements and allows clients to break down their investment strategy into appropriate parts and assess the risks that they are prepared to take for each of them. If, for example you were saving for a house deposit, to buy in the next few years, then a more stable and cautious investment route would be recommended for the relevant funds. When looking at saving for a pension, then you may have as long as thirty years before the funds can be accessed, and can perhaps therefore afford to take a riskier approach to the investments you choose.

Most important of all, though, is the assistance of an adviser who can not only identify these different elements to your portfolio, but assist you in navigating the best investment choices to make for each one.

We’re not here to nanny you, or to tell you that something shouldn’t be done, but to empower you in making financial decisions by helping you to identify your exact comfort and ability to absorb losses, and use that information to make the most efficient and profitable decisions possible for your own future.

The Confidence Trap

You’ve likely heard the phrase ‘confidence is key’ and certainly, in the modern environment it’s easy to think that being confident in your own capabilities is the single most important key to success in life. However, a recent study by Aviva indicates that financial confidence may actually be costly to those who have it, negatively impacting not only the financial decisions they take but their ability to recognise when mistakes are made.

But back to that old adage – ‘confidence is key’. What you might not realise is that the full story behind it involved several global surveys which indicated that confidence was key to ‘lifelong learning’ and that ‘hands-on lessons’ supported global success. In other words, confidence alone won’t get you very far without the expertise to back it up. Confidence is a good starting point, but it’s just that – a starting point.

How does that relate to the Aviva Survey? Well, nearly half those surveyed who had identified themselves as ‘confident’ in their financial decisions incorrectly believed that it was false that pensions attract tax relief, and almost a quarter did not apparently know that the level of state pension could be affected by the amount of national insurance paid.

Furthermore, 70% of those identifying as confident said that they would rather ‘play it safe’ and leave cash in a savings account than invest. FCA research indicates that £10,000 saved in cash in 2008 would be worth £11,720 by 2018, compared with the same amount being invested over the same period being worth £21,905.

What this all means is that misplaced confidence is causing people to make decisions based on false assumptions – decisions which cost them significant sums of money, and which will therefore directly impact their retirement plans, if they have any.

Confidence is a good start, but if you want to really unlock your potential in any walk of life, you need to take that start and combine it with education. Few of us have the time or resource to become experts in everything, which means seeking the advice and assistance of those who are. If you need surgery, you don’t think a can-do attitude and a hacksaw will suffice, so it makes no sense why people think they can take control of their financial destiny through sheer force of positive thought.

Speaking to a financial adviser will allow you to make sensible, focused decisions. Your confidence might tell you where you want to go, but their expertise will help you get there in the most efficient way possible.

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

27.01.21