Damian Davies of the Timebank takes a reflective look at how planning for retirement has changed over the years, and how the role of professional advice has evolved
As I started to write this article about retirement planning, it got me thinking. Strangely, I started thinking about food. I’d found some food rationing coupons which my grandparents had saved from the 1940s, and it made me realise what little choice there seemed to be back then, with just the basic foodstuffs to keep body and soul together.
The quality of our standard of living has improved, and the amount of food and choice we have available now has been transformed – 24 hours a day in just about everything. The times they are a changin’ as Mr Dylan said.
Then I started to think about the changes in “retirement planning” and whether they have been beneficial to the people needing the planning and advice? How has the advice process changed? What are we doing differently now? Is it really better than it was?
Don’t look back in anger
It struck me that only in recent times, and only as far back as the 1980s, did any choice start to emerge. But did people need, or get, any advice then?
In 1980, I would argue that the scope of available advice was very limited. For most, it may only have amounted to either staying in a company pension scheme or starting a private pension. Life seemed to be a lot more ordered, set out and predetermined. People had a decent chance of working for the same company for 40 years, and the vast majority retired at age 60 for women and 65 for men. That was it. You finished work and you either took your company pension plus your State Pension, or else you converted your private pension into an annuity to add to your State Pension.
There was no real choice for the majority, and no real scope for advice. If someone had to convert their private pension to an annuity, then they had to choose from a menu of pension choices with or without time or dependants’ guarantees, from the same provider. Once chosen, this was irrevocable – and it was a critical decision which a lot of annuitants were unprepared for.
Retirement was a cliff edge for most, a guillotine date that arrived, on a set day when you reached 60 or 65.
Back then, for most of the population, the general level of investment and pensions knowledge was very low, as it was for overall financial sophistication in general. Fortunately, annuity rates were substantial,at 12% plus, so with the benefit of hindsight it seems that converting to an annuity was quite lucrative – given where interest rates and inflation are now, and given the arguable demise of annuities.
It looks and sounds disgraceful now, but that’s how it played out for the majority. Cash flow planning, for a large part of the working population, amounted to surviving from one pay packet to the next. (Weekly of course). Of course, this still holds true for many, but the standard of general living has moved on significantly.
A new order
It’s difficult to see where advice came into the equation for the masses. Those with large sums to save or invest may have used a “broker” who practised the dark arts of investing in the stock market on their behalf. At the other end of the scale, direct sales people from insurance companies at least got people thinking about putting money away for their future – although many were led into expensive plans which they didn’t really understand.
This also hints at the vast social and cultural changes which have swept through the country and the financial services sector over this period. These days, no financial adviser would dream of advising their clients without first taking them through a comprehensive engagement process and procedure to ascertain, needs and goals, attitudes to risk and capacity for loss, cash flow planning and any number of other things. Only when the adviser believes they know all about that client and their situation would they present a comprehensively researched report including recommendations to help the client to meet their all-important goals in life.
So we can probably all agree that, with a few probable exceptions, it definitely wasn’t like that in the “good” old days. No choice, restricted markets and providers, expensive products, and very few if any retirement options meant that the majority were more or less forced to retire at a set date. There was a dearth of advice for retirement, other than basic stuff like “you need a pension, so how much can you afford to put into a private pension plan?”
There wasn’t an advice process or procedures which would bear any type of scrutiny now. Unbelievably, the absence of qualifications needed to become an “adviser”, of of CPD, or of effective compliance checks, meant that a sales culture prevailed, rather than a service based on meeting clients’ needs.
Cue the music from Ashes to Ashes, because it does now sound like life on Mars and totally alien from the retirement planning opportunities which are now in place – and which people expect. Not least of these are all the client safeguards and lifeboats ready to catch the ones who fall overboard.
Where are we now?
So, what has changed in regard to advice for retirement planning? And what particular areas might people need professional advice on?
Very few people joining the workforce now will gain entry to a Final Salary (DB) scheme – the shift away to money purchase (DC) schemes has continued to accelerate. This has dumped the onus on most individuals to plan for their own retirement and how they will provide for it. Many are quite likely to slip up here, with very serious consequences.
It’s difficult to see anyone now working for the same company for 40 years. There have been massive changes to industry, and the demise of so many old-fashioned manufacturing industries, including coal mining, steel manufacturing and shipbuilding, to name just a few. Some, however, have had a rebirth and a resurgence – such as car manufacturing.
People are more mobile these days when it comes to the world of work. This brings added complications when it comes to financial planning, because taking control of matters like income protection as well as retirement planning comes down to individual choices.
Meanwhile mortality rates have fallen, with people living well into their 80s, and this change has had major consequences for retirement planning. Clients who expect to live longer will need to have potentially accumulated more capital if they are not to run out of money, or if they are to deal with the impact of inflation.
The State Pension age has risen dramatically for women. Those now under the age of 55 are looking at receiving their State Pension at age 68 – and who says this won’t be postponed further? Meanwhile the numbers of people who ‘phase’ their retirement through part-time work and partial access to pension funds are likely to increase in future, due in no small part to the increase in the State Pension age.
Pensions simplification has been and gone. Perhaps this was the most ill-named initiative ever? ‘Pension Freedom’ has now arrived, just so long as you meet all the rules, but it needs to be handled with care if people are to avoid running out of money too soon.
We all know that there are many different types of pensions now in existence, and lots of different ways in which people can access them. And the jargon around pensions is a separate lexicon that very few non-financial services professionals will ever understand.
There is still a confused belief for many people, that pensions are an investment in themselves, rather than just a tax wrapper in which to hold investments. Often we hear people arguing that they don’t “like” pensions, and that their houses or businesses are their pensions. Many operators have been openly touting buy to let as a better way than pensions to plan for old age.
Annuities are dead! Long live flexi access drawdown! But what really is drawdown, people wonder, and how does it work? “Phased retirement and the efficient frontier”? To many, this might sound like something out of Star Trek.
These are just for starters. Let’s add in a few more complications. How about the position regarding private pension death benefits and the taxman? Beware the bogey man, especially if you transfer from a final salary scheme and have the temerity to die within two years. Then there’s sequencing the investment of funds. Assessing risk, volatility and expected investment returns pre- and post-retirement is no easy task. Thank goodness that cash flow planning processes are available to us, but individuals who do not take advice do not usually have the advantage of using these effective tools.
Meanwhile, back at the IFA’s offce…
Fortunately, knowledge of effective legacy planning can ensure that the transfer of wealth to the next generation happens in the most appropriate way. It can be a minefield even for professionals like us, let alone for DIY investors. Complications from auto-enrolment, work place pensions, salary sacrifice, LTAs, MPAA and maybe even the pension protection fund can all muddy the waters still further.
The list just goes on and on and on. You know what I’m talking about, but ask yourself, what chance do the general public have here. Do they have the faintest idea of what all this means and more importantly what they need to do to plan effectively for their retirement and into retirement? Whether they like it or not, it’s up to them to figure it out or ask someone to help them. When people say “I need a pension” what they really mean is I need someone to help me plan for my future, for retirement.
As advice professionals, we know that to navigate our way around all the different legislation we need to understand complicated technical points and a huge range of options. It means having a considerable amount of technical knowledge and communication skill. We need to be able to articulate these complicated scenarios to a client in a way that they can understand, so that they can see quite clearly how it all applies to them. The ensuing discussion needs considered advice. Everything I’ve listed will require advice at some point.
Stand by your families
Even for those who may have a final salary scheme, social changes such as multiple marriages or partnerships with multiple children or same sex partnerships have made transferring out of defined benefit schemes something that more and more will contemplate and do. For example, why, if you are divorced with children and grandchildren of whatever age, would you not want to try and leave them something after your death? In so many DB schemes, if you die early into retirement, your benefits go with you.
This is not something the public will (or should) stand for. Low interest rates have compounded this effect, along with greater expectations from the public. It’s my money, it doesn’t belong to the Scheme Trustees, so who are they to decide what happens to my hard earned pension? And why should it just be swallowed up because I’m single?
Think of the complexities of all the permutations around just transferring from a DB scheme depending on the personal circumstances of the person or couple involved. Mind blowing. What chance does the average person have of trying to make an objective financial decision on what to do, taking into account all the pros and cons of the options available? I would contend, very little without your help and advice.
Pensions are not the only fruit
In the modern age of planning for retirement, advisers would be remiss not to also remind their clients of all the alternative, tax-efficient ways to save and invest that will get them to where they want to be for their retirement.
Yet again, this type of complementary retirement strategy creates another lexicon of products and choices. Most of these weren’t around at all not so many years ago. How many clients will know how all these products work and how they might assist them? Who do they turn to for advice on ISAs, LISAs, EIS or VCT? Combining the benefits of these different investments can be highly effective and is an essential part of modern day retirement planning advice.
A golden age for professional advice
If ever there was going to be a golden age for financial advisers and planners providing advice to clients on retirement planning, this is it. It has officially arrived, heralded to a large extent by the complexities and greater choice that successive governments have built into what is available out there. The choice for the public is just breath-taking and bewildering in equal measure.
Unlike 1980, this is now an age where there is no single, one-off solution that fits the majority. Everyone now deserves a tailor-made solution to meet their financial needs and aspirations.
Are we ready for this golden age? Definitely. There are more and better qualified advisers practising than ever before, with effective processes and procedures to guide clients that can convert a basic need of “I want to be able to afford to retire and live the life I want to live” into a reality.
Advice is now paramount for everyone, yet sadly, the reality is that more and more people are being disenfranchised from the advice process through fear, ignorance or the perceived and actual cost of getting it.
Explaining the menu
Let’s try an analogy. You, the adviser, walk into a French restaurant, and you find that the menu is in French. There is a reasonable chance that you (and the clients) will recognise most of what’s on there. Education and TV cookery shows have permeated our society – and by the same analogy, most of your clients will understand at least the principle of a pension.
Now, suppose that we put you in a Chinese restaurant, but it’s all in Mandarin. I doubt whether one in 500 financial advisers would know what they would be ordering. You need help, and lots of it, and advice and guidance. The waiter takes you over to the buffet and talks you through all the dishes on show, and you think, “that’s looks and sounds nice. I would never have thought of trying that or those two dishes would work together.”
Just think how much clients benefit from you doing this for them? And what’s more, they will willingly pay you for the privilege, once they can understand and see and feel the benefit for themselves. Planning for retirement is a key long term goal and a need which the majority will have to address. How satisfying then, to hold their hands and navigate them through what is the modern retirement maze, to set them on the right path to achieve a comfortable retirement and gain the peace of mind along the way that having such a plan in place will mean.
As an industry – no, as a highly qualified modern profession – let’s make sure that advice is never rationed like food in the past. Knowledge and advice are probably your most valuable commodities in this golden age as everyone will need them at some point. It’s our duty to ensure that as many people as possible can benefit from the planning process as we seek to help people avoid financial problems in later life and make their money work well for them so they can achieve their goals and live the lives they want to lead.
About Damian Davies
Damian established The Timebank in 2003 after being an adviser and discovering the need for outsourced paraplanning first hand. Since then Damian has directed The Timebank to be the largest paraplanning provider in the UK and is starting to grow the business internationally.