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