Welcome to a second bi-monthly commentary which I am writing to offer a fresh perspective on what I do and the challenges facing financial advisers on a daily basis. As always my working week involves speaking to a variety of different people from various walks of life and advising them on their financial affairs.
I want to talk about pension reform and the impact this has had upon my working week but more of a comment on how some things change but many remain constant in the advice world.
As I type this we have just listened to the first conservative budget since the days of Ken Clarke and Pensions have not been ignored. Although the pension "freedom" rules came into effect in April this year, already there is a green paper consultation announced with more changes on the horizon for pensions.
Since April, the "at retirement" landscape with regards to advice given has changed incredibly with the need to provide more options, cover all eventualities and also to ensure that the right choice is recommended. Sounds pretty easy, right? Well the media involvement has meant that the "cashpoint" nature of a pension has led to many people thinking that the best things must be to draw all the money out and spend it. And why on earth would you want to look at that thing called an annuity?
At the point of taking pension benefits, which of course may not mean retirement, the primary purpose of a pension must be remembered. What is my pension for? What's the point of it?
For most of us, the thought of running out of money, especially when we need it most, is not a pleasant one. If we are working then it's not the end of the world, as next month we would be paid again, so we can top up the coffers. But what if we were no longer working and there was no more money coming into the coffers?
With the new pension freedoms also comes additional risk. The risk of life expectancy increasing all the time, the risk of inflation and also the risk that volatile investment returns impact upon income.
Income sustainability and predictability are absolutely key in my opinion to a successful retirement strategy and many of my client discussions since April have been around just that. "No nasty surprises" "Will we run out of money" "What if we live well into our 90's" "Can we afford to keep taking this income" are common questions and rightly so. These are the primary concerns of many of us and who wants to be worrying about money once we have finished working if we can avoid it?
There is a real cost to volatility in investment markets too, if somebody is drawing an income from their investment. That cost is commonly referred to as "Deccumulation" or the accelerated decline of a fund during investment volatility and with money being withdrawn from it simultaneously. The perfect investment storm.
Of course, an annuity would avoid the pitfalls outlined. A certainty of income, no risk of the "money running out" and once set up, it can be left to run its course. This is why an annuity should not be discounted automatically as appropriate as they still have a place for the risk averse with no desire for uncertainty. No risk of outliving your savings there. The enhancements offered by someone taking medication or suffering from poor health can also not be ignored.
The one reason that we could discount an annuity however is a desire to pass on funds to dependants, or pension legacy as it is now referred. Paying health care costs, passing funds to loved ones, and a desire that nobody should profit from our early death, are all areas where advice is key to ensure the most appropriate choice.
So, what if we can have situation where the income is certain, the funds can be passed on to our dependants, the capital remains flexible if funds are needed, and extreme stock market movements are comfortably dealt with?
We have that available now and that is what makes the new pension rules so attractive for people drawing their pension benefits under the current legislation.
Ian Howell DipFA MIFS