Royal London

Getting your house in order

Maria Espadinha

Pensions Reporter, FTAdviser

How advisers can help older clients prepare themselves for retirement

Baby boomers are often considered to be the lucky ones. Most likely they will have a defined benefit (DB) pension which will guarantee a good income in retirement, and they also benefited from rising house prices and generous equity markets.

However, with the introduction of pension freedoms there are myriad choices available for savers approaching retirement age, which is no longer set in stone.

Financial advisers should be ready to attend to the special needs of this particular group of individuals, and help them make the most of their savings.

Maximising pension contributions

According to Fiona Tait, technical director at Intelligent Pensions, the key difference between baby boomer and younger clients is “they must start thinking in terms of how much income they want out of their pension, and how much they need to put in to fund this, rather than the other way around.

“This helps them to prioritise their spending and puts the amount they think they can afford to save into context.”

For Sir Steve Webb, director of policy at Royal London, the most effective way of getting a large pension pot is to make the most of the employer contributions under auto-enrolment.

“Most employers will match what the individual puts in (up to a limit) and some will go further, such as a double match”, he states.

“Encourage clients to carry forward unused annual allowances from previous years.”
– Sir Steve Webb, Royal London

However, savers should not assume the level they are currently paying is necessarily the maximum, since many firms ‘default’ people in at a lower level and individuals have to actively opt to pay more, he adds.

Claire Trott, head of pensions strategy at Technical Connection, argues state benefits – such as they are – should not be forgotten, since they “can provide a valuable base level of guaranteed income to base the rest of the advice on”.

“Making sure that records are complete and accurate before state pension age is important, as well as investigating if any top ups need to be made to ensure the full state pension is available”, she adds.

Multiple pension pots

According to Willis Towers Watson, during an average career a person can have approximately 11 pension pots.

Therefore, for Sir Steve Webb, it might be worth doing an audit of lost pensions, by using Pension Tracing Service from the Department for Work and Pensions (DWP), which helps people finding their lost savings.

He notes many older workers may instinctively want to combine the several pots “in one place and or access them as soon as possible”.

However, he explains it is important to explain to clients “the value of things such as guaranteed annuity rates, and also make it clear to them that consolidating all your pensions in one place is not necessarily the best thing to do,” he adds.

“When you start to take money out it will be taxed to some extent, and the quicker it is withdrawn the higher the tax bill is likely to be.”
– Fiona Tait, Intelligent Pensions

Ms Tait believes having “pensions in one or two plans rather than five or six makes them much easier to track and monitor progress in line with their financial plan”.

However, whether this is a good idea will depend on the type pensions that they hold and should be analysed case by case.

Talking about tax

According Martin Bamford, chartered financial planner for Surrey-based Informed Choice, baby boomers entering retirement often “want to pay as little tax as possible, perhaps fatigued after a lifetime of paying tax on their income from employment”.

However, it is important to explain the basics, and that “pensions are extremely tax-efficient so long as money is left within the plan,” Ms Tait says.

She explains: “When you start to take money out it will be taxed to some extent, and the quicker it is withdrawn the higher the tax bill is likely to be.

“This general concept should help your clients to understand that putting money away will be rewarded, however withdrawing it should be planned carefully to get the best results. You can then look at the more detailed rules as required and in the context of their personal situation.”

Nevertheless, there are some ‘tricks’ that advisers should be aware of, Sir Steve states.

“Encourage clients to ‘carry forward’ unused annual allowances from previous years. Although the annual allowance is £40,000 for most people, if you have unused allowances from earlier years this means you could put more than £40,000 in.”

Older clients should also be made aware of the money purchase annual allowance.

In simple terms, once the client starts drawing taxable cash, then the amount they can subsequently contribute into a pension each year and get tax relief slumps from £40,000 to £4,000, he added.

Sir Steve also warned that if the client will be paying tax at the standard rate in retirement and their spouse will be a non-taxpayer, they should claim Marriage Allowance for income tax.

Different options at retirement

The introduction of pension freedoms in 2015 has given many people the opportunity to phase their retirement, says Ms Trott.

“Gone are the days when you retired one day, received your pension the next and never worked again.”

This flexibility, however, “is very beneficial for clients who want to cover one-off expenses, or who are looking to retire gradually”, Ms Tait comments, adding: “But clients should never lose sight of the primary need to provide the income they need to live on.”

According to Mr Bamford, ultimately it will be “a choice between the security of a guaranteed income for life from an annuity purchase, or maintaining some flexibility and opportunity for investment growth with income drawdown.

“Because these retirement income decisions tend to be permanent, it’s essential to review all of the options carefully, as they apply to your personal circumstances and goals for retirement.”

Ms Tait adds that “a cash-flow plan is ideal for illustrating how different assets can be used to meet the client’s expected income requirements over time”.

One of the biggest challenges for advisers in this part of the advice process will be to help clients not being seduced by a huge DB cash equivalent transfer value (CETV), Sir Steve concludes.

He states: “This may be their largest asset and they need a realistic understanding of how long it needs to last.

“Transferring ‘might’ be the right answer, but not simply because the CETV is an impressive six figure sum!”

Maria Espadinha is pensions reporter for FTAdviser

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