To understand and describe
1. How the changes introduced by the March 2015 budget affect those coming up to retirement
2. How to assess a client's capacity for loss and attitude to risk
3. How to put together a secure income strategy for clients
4. Why longevity risk is an important consideration in retirement planning
5. The dangers of pensions liberation
Tutors on the panel are:
· Les Cameron, Head of Technical Distribution, Prudential
· Steve Martell, Director, Development Intermediated Distribution, Just Retirement
The secondary annuity market
LES CAMERON: Yes, I don’t think there was anything new that we didn’t expect in the budget. The
two key things in the pensions world was obviously the creation of the secondary annuity market,
giving people the ability to sell on their income streams, and that will have advice implications in
future, whether that’s a good idea for people, and then the second one was widely trailed, which
was the reduction in the lifetime allowance, so we’re now going to see high earnings, possibly senior
civil servants, senior doctors, people like this, are now going to be affected by the reduction in the
lifetime allowance to a million pounds. There’s going to be some transitional protections in there, so
there’ll be a lot of high net worth advice required between now and next April.
One of the good things was they kept tax relief unchanged. We always get rumours of a change to
tax relief before a budget or an autumn statement, and that’s about the fifth statement in a row
where it’s been staying the way it was.
PRESENTER: Well let’s pick up on that annuities point. I mean, Steve, does anybody know how this
secondary annuity market’s going to work?
STEVE MARTELL: Well there’s a consultation in progress at the moment. It’s an interesting
opportunity, for any market there’s needs to be buyers and sellers, and you can see why some
people might want to be sellers of their annuities, but equally those buyers will probably need to
underwrite, probably need to value the present value of the future income stream, so people may
be in for a bit of a shock in terms of the valuations that are actually required for this.
So there’s quite a lot of detail to go through. For example, will people require advice? And I think
probably the answer to that is yes. And will advisers want to actually advise people on this area?
Will they need special permissions, for example pension transfers? You know, valuing an income
stream and giving an assessment as to whether it’s fair value is actually quite difficult, and that does
require quite a lot of specialist knowledge, and then you need to factor in the profit margin for the
purchaser of the annuity as well, so there are a lot of details to be thrashed through here, so
consultation required and then, with implementation, April 2016.
PRESENTER: Right, so presumably it sounds like it’s going to be even more complicated than the
STEVE MARTELL: Well the TEPs market was really one where you were looking at an investment
choice; this is more of a longevity play. So it’s valuing the income stream and the income that comes
from the asset. So, you know, quite a different market from that, and also quite a different market
from traded life policies, which of course there’s no income stream at all from traded life policies,
you just have to wait for people to die, but this is an income stream being paid out and is valuable to
the institution that may want to buy it of course.
The lifetime allowance and its impact on DB and DC members
PRESENTER: Okay and moving on from that, Les, you mentioned there the reduction in the lifetime
allowance. The lifetime allowance, is that the amount you build up in your pension or the amount
you contribute into it?
LES CAMERON: On the way in it’s the annual allowance, that’s £40,000. The lifetime allowance is
the total amount of tax privilege pension funds you’re allowed. So it’s your fund at the end, or the
amount of pension at the end that gets tested against the lifetime allowance. So a million pounds
fund would buy you an inflation proofed income of about £26,000 a year. But in the defined benefit
world, the public sector, you multiply the pension by 20. So anyone relatively senior with a decent
level of service could be on a defined benefit pension of £50,000 a year; these people have lifetime
PRESENTER: Well, stick with that £26,000 figure, but that does that imply that things like ISAs are
going to become a much more important part of retirement planning?
LES CAMERON: Well I think ISAs are an important part of retirement planning and I don’t think you
can just use one product to meet your retirement needs, but the frank matter is not many people
save up a money purchase pot of a million pounds. Plenty of people will have plenty of headroom
before they get anywhere near a million pounds. I think it’s mostly a problem for the defined
benefit world, the public sector, people that are just saving into a personal pension or a GPP, not
many of them will be getting near a million pounds. They could just use a pension and forego the
ISA if they wanted to.
Flexibility of advice during a period of radical change to pensions
PRESENTER: And I suppose picking on just generally, I mean, Steve, one of the things is pensions has
obviously become quite a political topic in the last few years. For years, we complained no-one’s
politically been interested, and now we’ve got what we’ve all wished for. What do you as an
adviser? We’ve got an election coming up. It’s very easy for chancellors to make changes and new
budgets. Do you work with the rules you’ve got today or do you just step back and say let’s do
nothing for 18 months until it settles down?
STEVE MARTELL: It’s very difficult isn’t it? I mean a lot of people have deferred already since the
budget last year. So a lot of people that would have taken their benefits have actually not taken
their benefits. And if they’re still working, then that’s okay, and they can carry on working, there’s
no need to take their benefits. But if they’re about to retire, or they are retiring, then that’s a
different equation isn’t it? And you can only really give advice at any one point in time based upon
the legislation that exists.
This has become a little bit of a political football, you know, the election may well have a result on it,
but should people defer any further? Well I think if they are at the point of needing to make the
decision, then they need to go and see an adviser, and they need to talk through their options, and
to weigh the pros and cons of taking that decision now subject to possible changes.
PRESENTER: Les, what’s your take on it? How do you retain maximum flexibility for your clients
during this period of pensions uncertainty?
LES CAMERON: Yes, well I think agree with Steve. If you come to retirement, you have to retire if
that’s your set point in time. You can’t have planning blight, where you constantly put off decisions
because the law’s going to change. We have a budget every year; we have an autumn statement
every year; if you keep deferring decisions in case the law changes, you won’t really get anything
done. You should get your advice and do it at that time. You know your client, you can go back
annually to see them, if anything has changed you can tweak plans or change plans.
Maximum flexibility means not locking into something that you can’t get out of. So people might go
into drawdown, stay there. That’ll put off having to make any decisions if they want to get some
amount of money. Obviously, if you annuitise, the problem was it’s a day one decision. You’ve done
it, you’ve no flexibility anymore. Some products have got flexibility over income levels. But I think
it’s don’t defer, plan with what you know.
The importance of a client’s capacity for loss
PRESENTER: All right, well thanks. Let’s move on, because we wanted to move on to some of the
issues around meeting client objectives. So, Steve, we’ll bring you in here. Starting point of this
when you start to think about clients’ retirement planning, what should you start with?
STEVE MARTELL: Yes, I think the first point is capacity for loss. That has to be the start point of any
conversation, to what extent can they suffer a fall in the capital value of the assets that are
producing income. Now, if you think in terms of Maslow’s hierarchy of needs here, the Maslow
hierarchy of needs states that once you’ve paid off your debts, that you move on to your essential
income: your personal minimum income requirement, the sort of essential expenditure that you
need to pay the monthly bills. So that really has to be the starting point.
So it shouldn’t be a question now of I’ve got a £60,000 pension pot, how much income can that buy
me? It should be more a question of well how much income do you physically need to pay the bills?
That has to be the start point of any conversation, before you then even move on to attitude to risk.
There has to be capacity for loss dealt with first of all.
PRESENTER: Okay. So find out what your bare minimum is there. Once you’ve done that, what’s
the best way do you think of securing that income stream in perpetuity, particularly given how long
people live, so there’s that inflation element built in over time?
STEVE MARTELL: Yes. I mean inflation is a difficult one to deal with. Most people when they look at
the concept of inflation want to fund for it, but when you show them the cost of physically funding
for it, either with a real asset portfolio or an annuity, that they kind of settle on the level income
aspect of it. I think for most people to deal with their capacity for loss, the essential income that
they require needs to be provided by something that’s secure, and something that’s secure, well it
really is the annuity.
You know, an annuity purchased on the open market, preferably one that’s underwritten, that
provides that secure guaranteed income for life. That they know then that there is that monthly
paycheque coming in to actually physically pay the bills. And from there, of course, once you’ve met
that capacity for loss, then you can begin to assess their capacity for risk, and their appetite and their
attitude towards taking for risk. So that then becomes much more of a relevant factor, but only
when you physically satisfy the capacity for loss.
PRESENTER: So, if you’re an adviser, is this really almost sit down and go through the fact-finding,
and even if you might have done one years ago and collected quite a lot of data on the client, it’s
worth doing that formal process all over again?
STEVE MARTELL: Yes, quite a few advisers have actually updated their fact finds to go through the
income and expenditure position much much more thoroughly, whereas previously the decision may
have been well you’re going to buy an annuity with a relatively small pot, that’s no longer the case.
They do need to physically look at how much the client is spending, and drill down into that, and
quite a few advisers have now changed their fact finds to incorporate many more questions in
relation to how much the client does physically spend, to meet that requirement first.
The client’s attitude to investment risk
PRESENTER: Les, from your point of view, I mean clients, do they have a realistic attitude to what
their capacity for loss is, and does it measure up with what they think their capacity for risk is?
LES CAMERON: When I speak to advisers, I think you’ve hit the nail on the head, they’ve got a
certain attitude to investment risk they’ll take, but it doesn’t tie in with the capacity of loss they’re
able to take. So they might be willing to say I’m happy for some investment risk, I’m happy for my
funds to rise and fall, but then on the other hand they’re saying I don’t want my income to reduce,
then if you have a loss of capital that will have a knock-on effect on your income normally. So they
do get the two mixed up.
I think capacity for loss, I agree with Steve, is important, but I think it’s interrelated with attitude to
risk. You can’t separate them out; you have to think about both of them together. If you don’t have
any capacity for investment risk, you could still go in a cash fund and draw down, take 4% and it
would last you for 25 years. So I think you can’t separate one from the other, you have to do both at
the same time. But, frankly, with a median annuity pot of £17,000 - the average is only £30,000 -
most people can’t meet their minimum income requirement anyway.
Maybe if you’re rich you might have the ability to stick on your income. I think it’s about trading off
what risks you are willing to do in retirement. If you can’t meet your minimum income requirement
do you settle just for the amount you can have, or do you introduce some investment risk to try and
get your income to grow etc.?
PRESENTER: Well I take your point that the more money people have got in their pot the more
choices they have, and if you haven’t got money you haven’t got choice, but let’s assume we’ve got
someone who has a degree of choice in what they do. Again, just picking up on Steve’s point there, I
mean Steve was suggesting very strongly an annuity’s a good way of just securing that basic level of
income. Given how low rates are, at the moment, would you go along with that or do you think it is
worth potentially taking a bit of investment risk and having perhaps a fluctuating income?
LES CAMERON: Yes, I think this is why financial advice is important. Retirement planning’s got a
multitude of moving parts, and some parts are more important to the other. Some people don’t
care about inflation, they’re happy with a level income; other people just want to know there’s £75
gone in the bank every month. But if you want to try and build your income or hedge against
inflation you just have to put some investment risk into the equation. Now whether they’ve got the
ability or the attitude to risks which would allow that to happen is an unknown, but that’s a
conversation you have to have.
PRESENTER: And Steve, picking up on that, I mean attitude to risk, how do you work it out? Because
if it’s a fabulously sunny day, everything’s going well, I’m feeling good about myself, I’ll probably
have quite a high attitude to risk. If I’ve had an awful day, I’ll probably have a slightly more
conservative attitude to risk.
LES CAMERON: Yes, I mean if stock markets have been going up for a period of time, then things
look great don’t they? But then on the other hand if they’ve been going down, as they did between
August and December, 11% fall, followed by a 14% rise from December to now. So you ask someone
now and their attitude to risk is probably completely different to what it was last September, but
that’s the skill of the adviser in terms of teasing out and actually looking through all of that noise to
determine what the client really does think and the degree to which they are prepared to accept
that the upsides of being invested in the market you need to feel comfortable with the downsides.
And no-one actually wants to take any investment risk. I mean I think that’s clear. But to what
degree are they prepared to take some investment risk in order to meet their objectives. And if they
are prepared to take some investment risk then the meeting of those objectives is quite possibly
more likely to be achieved. But on the other hand if they’re absolutely adamant that they don’t
want to take that degree of investment risk then perhaps they shouldn’t. But that’s the skill of the
adviser going through the advice process. Advisers will have their own ways of determining attitude
to risk and their own systems for doing that, and we would urge them to carry on doing that.
But I do just go back to the point about capacity for loss, because if a client has maybe the average
£50-60,000 that we see then the income from that portfolio might be important. And if that income
does take them to the point of their personal expenditure, then that’s a good place to be, and that
needs to be the benchmark as the first calculation that’s done. So I think it’s critical that everyone
does perhaps fill in a health questionnaire to actually create that benchmark income so that they
know what they’re comparing it against, that that way any comparisons are valid rather than
perhaps being invalid.
PRESENTER: Okay, Les, picking up on that, we were talking about attitude to risk. We’ve talked
about attitude to investment risk. What are the other risks that clients need to think what their
attitude is? I mean, I don’t know, longevity, inflation, what are the key ones?
LES CAMERON: Yes, the key risk is your attitude to investment risk, because that will determine how
you can manage all the other risks in retirement. So you’ve got inflation risk, the value of your
money will fall if you’ve got a level of income. The longevity risk, that’s the key one. The good thing
about an annuity is you’re ensuring your longevity risk; you’re making sure you never run out of
money. Go from there the sustainability risk. You may not have a secure income, but it’s being able
to sustain that level of income, that’s another risk. Capital risk, are you happy for your funds to
deplete if you want your beneficiaries to benefit from your pension after you? You might not
actually be wanting to take any capital risk with your money. So there are layers and layers and
layers of risk beyond investment risk, but investment risk will drive how you can deal with the rest of
How age affects attitudes to security of income and capital
PRESENTER: And just turning from there to this issue of security of income and we’ve talked a lot
around annuities, but what are some of the other ways of securing income? It might involve taking a
little bit more risk, but how do you go around that?
LES CAMERON: Well I think we’ll probably see a rise of guaranteed drawdown products, potentially.
You may go into drawdown, but you’ll have a minimum secured level, likely to be lower than an
annuity rate you could secure, but there’s still a secure base. So, we’ve done research, we’ve found
a lot of clients were quite happy to take investment risk, take some risks with their money to try and
grow their income, as long as they knew there was a floor, there was a safety net you wouldn’t go
any lower. So there’s that. There’s lots of different guaranteed solutions. You can buy flexible
annuities, which have a minimum income guarantee; you don’t have to stick on a level conventional
PRESENTER: But when we’re talking about security, do you think it’s security of capital that’s more
important or it’s going to be security of income?
LES CAMERON: Well, it’s horses for courses again. If you’ve got other sources of income, you might
be more keen on keeping your capital intact; if you haven’t got any other sources of income, then
you’ll be able to see capital depreciation as long as you can secure your income. So it’s kind of very
specific. This is why you need financial advice. Advisers can talk you through the pros and cons,
matching your needs, gots and wants to the product that’s best suitable for you.
PRESENTER: And, Steve, I mean retirement can be a very long period of time people are living for,
how does one’s attitude towards security of income tend to change as you get older - because I can
see it could be very different at 90 from 63?
STEVE MARTELL: Yes. I mean people in their mid-60s are relatively young these days and they’re
likely to be more bullish about markets, but, you know, as they age, they do become more cautious.
So that in their mid to late-70s then they may have a completely different attitude to risk from aged
65. So it’s important there to measure that and to actually have those touchdown points,
particularly in their 70s, to see whether people still do have the same objectives, you know, to what
extent do they want to begin to securitise some of their income in some shape or form, and maybe a
partial exit, so a phased exit.
People talk about the decade of annuitisation from age 70, you know, that probably holds good for
most people. People don’t necessarily have hundreds of thousands of pounds in their pension pots,
I mean you’re talking £100-200,000 and that income is probably important to those people. So
there comes a point where they may seek at some point later in their retirement to begin to
annuitise. Things get pushed back by time so that buying an annuity may happen later.
PRESENTER: I mean it’s a very unfair question, but if you delayed annuity purchase from 65 to 75,
and at that stage you thought do you know I feel much more conservative now, I’ve maintained my
capital, taken a bit of income, now want to - what sort of uplift can you get?
STEVE MARTELL: Well a 75-year-old might be getting a 7½% annuity rate, something like that,
compared with 5½-6% at the moment. So the range is quite significant. So the attraction of the
annuity does become that much greater as you do begin to age.
Minimum pension pot levels for drawdown
PRESENTER: Okay and taking that point on, in terms of other things that are happening, I mean I
suppose I want to come back on something you were mentioning earlier, Les, you were saying about
this issue of choice and how much money you need to have choice. We hear a lot about drawdown,
but is there any rule of thumb about how much money you sort of need in your pension pot before
drawdown becomes a sensible option to consider rather than perhaps a pipedream of flexibility?
LES CAMERON: I’ve got quite a contrary view of this. The general view used to be you would be
looking at six figures, you would need £100,000 to allow you to go into drawdown and take the risks;
I think that £100,000, it’s not actually been there, its specific circumstances will dictate whether you
can go into drawdown. But this is about getting to what the client wants and needs. Because if you
go into drawdown with £50,000 and put it in a cash fund and you’re happy to take £2,500 for 20
years, drawdown will do that for you.
So I think there’s no hard and fast rule of thumb, you have to find out what the client needs, what
the client wants, what the capacity for loss is, and then match the product to suit them. That could
be a £50,000 drawdown or it could be a £200,000 drawdown, it’s just that individual client and their
attitude to risks, the risk they want to manage in retirement. I think what Steve says, I think what
the freedoms might just do is push on the age of annuitisation a little; it might become 75 to 85,
from 70 to 80. I think there’ll fundamentally be a point where you just want to secure your income,
you don’t want it anymore.
PRESENTER: Okay, Steve?
STEVE MARTELL: Yes, I mean there’s also a point that we assume that people just have one pot, but
they don’t, and many people have got final salary pots. Now if you’ve got people with final salary
pots and money purchase pots of £30-40,000, then going into drawdown with that if they’ve got a
decent final salary income is a really realistic thing to do, or if they’ve got an outside investment
portfolio that’s a couple of hundred thousand pounds, money in ISAs etc. So it really does depend
on the client circumstances. So putting a value on how much money you need to go into drawdown
is virtually impossible and, you know, with the new rules with freedom and choice anything is the
LES CAMERON: I think we have to remember that the Chancellor said in his budget was a budget for
makers, doers and savers. The freedoms were a lot of changes to exiting your pension, but the point
of it was to encourage people to save. So maybe we’ll see in half a generation or a generation’s
time, if things go unchanged, we might see bigger pots in future, because the pension now looks like
a very very good accumulation vehicle for retirement. So hopefully we’ll get bigger pots in future,
people have more choice in future.
PRESENTER: Just picking up on a point was being made earlier, Les, with an annuity, you hear a lot
about sort of enhanced annuities, for example, or the underwriting around those. If you do have a
client that thinks drawdown’s right for them, as an adviser how much time should you be spending
thinking, you know, what’s their state of health, wellbeing, all of that, because presumably that will
have an impact on their longevity, or it’s something to take into account when you’re working out
their retirement strategy?
LES CAMERON: Yes, I think you have to consider an annuity all the time, you have to have a
benchmark to run off, and if you have got health issues you need to look at what you would get from
an enhanced annuity, and then once you know what your secure income number is you can then
start to decide whether you’re willing to go away from that security. So you should spend as much
time talking about health when somebody’s gone into drawdown or somebody’s going to annuitise.
Longevity and its impact on securing a stream of income
PRESENTER: Okay and we’ve talked about longevity risk a few times, but, Steve, have you got any
figures you can put on that? I mean how long is longevity for a human being?
STEVE MARTELL: Yes, well longevity for the average annuitant, for male 65 is 23 years, for a female
that’s 65 it’s 25 years to age 90, but 50% of people will live well beyond that period. So longevity
isn’t about how long you live to an average, it’s how long you might like to, and if you take a couple
that are 65 then there’s a 46% chance that one of them will still be alive at age 95. Now that’s
actually quite staggering and that really does reveal the nature of longevity and, you know, I think
that the whole issue about longevity does reveal the fact that people are cautious.
There was a survey done by the International Longevity Centre published in January, they did a
survey of 5,000 people in DC schemes aged between 55 and 70, and something like 70% of them
said that they wanted a guaranteed income, and 75% of them said that they preferred a guaranteed
income stream over one that rises and falls in line with markets. So clearly people first and foremost
are saying that they do want the guaranteed income, which means that when advisers speak to
them about drawdown they have to be really clear as to what the implications are of drawdown and
People think that they want something that’s no risk, but is that really what they want, or do they
want something with an element of risk in it? You can’t necessarily get the solution that you want
with one product these days. Suppose you have £100,000, you know, it could be that in order to
meet your objectives that you need to go 50/50 between drawdown and buying a secure income
through an annuity. That way you deal partly with the longevity risk, through the annuity, and then
you deal partly with the other considerations in terms of the flexibility risk through drawdown. So
probably a blended solution for that type of client is going to become increasingly important as we
go into the future.
PRESENTER: And those figures you were mentioning earlier about longevity, how have they changed
over the years? I mean if we were having this conversation in five years’ time, would you be saying a
STEVE MARTELL: Yes, I mean longevity’s like a dripping tap. You know, as each year goes by, then
you get a marginal improvement. So over a five year period it won’t be that significant. Over a 15 to
20 year period it will look quite significant. If you go back a generation ago, you know, average life
expectancy was, I don’t know, perhaps aged 75. So that shows how much it’s moved on.
Longevity and long term care implications
PRESENTER: And Les, within I mean the length of time people are living for in general is going up,
but is the length of the quality of life they’re having going up or is there I don’t want to sound
mawkish, but is there a bit at the end where we’re sort of sicker and cost more for longer?
LES CAMERON: Yes, I think you enter retirement healthy and then inevitably as people are living
longer they’re not leading healthy lives, they start to become unhealthy, so their income needs may
go up again and they might have care costs or refit their home for their stairlift or whatever. So, yes,
the type of retirement’s now different, because it’s good health and then starting to decline in
poorer health, and then potentially fundamentally going into a home perhaps. Then there’ll be the
long-term care costs.
But picking up on what Steve said earlier, well you won’t be able to find an adviser in Britain that will
find you a no-risk retirement. There isn’t a no-risk retirement available; you just have to choose the
risks you’re willing to accept. If you don’t want any longevity risk, you have to annuitise, but then
you may suffer from inflation risk; you may die too young and lose all your pot, so there’s those risks
there as well. So that’s why you have to go and find an adviser and understand the types of risks
you’re willing to take in retirement.
PRESENTER: But taking all this together, I mean is the conversation one about retirement or is it
actually becoming a conversation about retirement and long-term care all packaged up together?
LES CAMERON: Yes, I think we don’t use the word retirement anymore, it’s just the lifestyle after
you hit a certain age. You might still be active, you might be inactive, you might be working part
time, you might be doing charity work or whatever, so it’s just a later life lifestyle conversation you
have to have. The same way you’d have a lifestyle conversation with anybody at any age.
PRESENTER: And you were mentioning just a little earlier about annuities and perhaps putting
guarantees and things, but what’s the appetite as product providers from putting guarantees on
products these days? I thought we’d sort of moved through a period where the G word would
become a lot less popular, people didn’t want to tie up their capital.
STEVE MARTELL: I think that because the freedoms have been introduced, people have begun to
focus on capital. Now, as those conversations with those clients begin to take place and it comes
out that they are cautious, then providers are naturally thinking about guarantees and secure
income solutions. So you will see perhaps the rise of unit-linked guaranteed products. You know,
products that pay 3.75% income, is that a good deal or a bad deal? Well if things go well it could be
a good deal, but there’s quite a gap between that and the typical annuity rate. So you can have
potentially quite a few years of a lost income, you know, and when you look at whether an annuity
as a guaranteed product is good value, and let’s take an example.
Let’s take Peter who’s 65. He believes he’s going to leave for 15 years, he gets offered an annuity
rate of 5%, does a back of the envelope calculation and works out that he’s going to get 75% of his
capital back - not a great deal, I don’t think I’d buy that deal, you know, it doesn’t seem very
attractive. And then you’ve got Paul, who is also 65, who does a similar calculation, but thinks hang
on my relatives have lived to a ripe old age and I think I’m going to live to at least aged 90, and gets a
6% annuity rate. So in his case it’s 25 lots of 6%, which is 150% of his capital back. One is twice what
the other is.
You know, the question is what is the reality? And the point is we just don’t know, but that’s the
point about longevity and the longevity insurance that you get with an annuity. Other guaranteed
products come at that solution in a different way, but inevitably they will produce less income than
the annuity. So maybe a blending together with other guaranteed products might be the solution
for more cautious people in the future.
The tax advantage of pension over Isa
PRESENTER: A lot of this talk we’ve heard that perhaps suggests is the conversation presumably
clients are easier if people had saved more to begin with. You know, it’s not just about how you
manage your money out, it’s how much you put in in the period before that. Tackling it from the
other way, I mean as an adviser how easy is it given this backdrop we’ve got in pensions to persuade
people that topping up pension, putting a little bit more in is a good thing? You know, it might make
conversations easier in ten, fifteen, twenty years’ time.
LES CAMERON: Yes, I think the fundamental shift through the budget has been the complete access
to your money before. I think everybody knows tax-wise pensions will probably outperform
everything else just through the tax benefits you receive, but they’ve always been put off by the
requirement for an annuity or not getting access to their capital, maybe being restricted to a GAD
rate. So I think it’s explaining that what the budget’s done is given you total access to your money. I
think everybody knows pensions are the best tax wrapper for saving for retirement; it was just the
lack of access that put people off. I think things will change and it’ll just be the go to wrapper for
saving up for your retirement.
PRESENTER: Right, so thinking back to our earlier conversation it actually becomes more attractive
LES CAMERON: It is more attractive versus ISAs. If you put £80 in an ISA you get £80 back out; if you
put £80 in a pension the Chancellor makes it £100. Even though it’s taxed, if it’s basic rate, you’ll get
£85 out. The question is would you rather have £80 or £85 for your £80? The numbers work.
PRESENTER: But do you worry, Steve, at all about people, because they can get access to this money
to taking it when it’s not really in their long-term interests to do so? You start hitting it at 55; you
still might not be fully retired.
STEVE MARTELL: I mean there’s been so much publicity about this and a pension is designed as an
income, and being able to access it from age 55, it’ll be interesting to see just how many people that
are aged 55 or more that aren’t retired do seek to access some money from their pension fund.
And, you know, one hopes that they will seek guidance and advice on those issues and that the
second line of defence that will get called in there. Because to actually take that money from their
financial future to physically spend it now, unless there’s a very good reason, maybe if there’s a debt
to repay or something like that, a relatively small pot, a debt to repay, clear the debt and therefore
move on from there, but just to spend it on something that may be temporary in terms of holidays
or a new car, there is the real risk of that happening, and it will be interesting to see just how many
people do seek to do that.
Managing the switch from accumulation to decumulation
PRESENTER: Yes, okay, one of the risks we’ve mentioned earlier, I’m going to spend a couple of
minutes on it was investment risk, and we’ve touched on it, but, Les, to what extent is investment
risk down to your investment timeframe rather than just the pure volatility of an asset? Because
presumably if you’re in equities with a 40 year view, you can afford to suck up a lot more risk than if
you think I’m in them for three years, which is probably not the right asset class to be in.
LES CAMERON: I think it’s journey risk you have to consider when you’re looking at investment risk.
You might have a 40 year journey, but the client might not be willing to see statements coming in
that are 20% lower, 20% higher. They just might like a nice steady journey. They’re quite happy if
their fund bumbles up without the highs and lows. So a timeframe’s important because that’ll
dictate how much volatility you can absorb, but a lot of clients it’s just a journey risk. They don’t like
seeing their money moving up and down; they’d rather it just gently went up, yes.
PRESENTER: Okay, so it’s about managing that experience.
LES CAMERON: Expectations of clients, yes.
PRESENTER: But again if you are running a portfolio how do you get it properly diversified? I mean
2008, everything sort of…
STEVE MARTELL: Well I mean things don’t…
PRESENTER: Extreme example but…
STEVE MARTELL: They don’t generally move south all together at the same time, so diversification is
important. You know, different asset classes in a portfolio, equities, bonds, property, commodities,
a blend of those asset classes is probably quite important, but it’s different in the accumulation
phase to decumulation, because if you’re accumulating, arguably, time removes the risk. Because, if
you’ve got a 20-year timescale, things are going to be higher at the end of that 20 years, all things
being equal, than they were at the beginning of the timeframe. But as you go into the decumulation
phase things are different, and that’s where you need to give more thought.
So people probably become more cautious as they move into the decumulation phase. If you get off
to a bad start in drawdown, then it can absolutely kill you. You know, the consequences to your
portfolio can be significant. But the likelihood of that happening, how great is that? Well there is a
chance of it happening. If you get off to a good start, you probably never look back. So it is a little
bit of a lottery and people have to accept that with their money there is that lottery element of the
wildcard in the decumulation phase as to whether asset values do go up or not, particularly in the
PRESENTER: Yes, so the sort of protecting your retirement pot in the few years after retirement is
almost as vital as this idea of sort of de-risking it at the end of the accumulation phase.
LES CAMERON: Yes, I think there are two points about the timeframe and the risk, asset classes
don’t hold their traditional risk shape. At the moment, fixed interest might be a bit high, which
would normally be considered lower volatility. It’ll be traditional to go into lower volatility fixed
interest type stuff at the point where you’re going to decumulate, but fixed interest hasn’t kept its
lower risk shape as the bond markets are high, whereas you could say fixed interest is more risky
So you have to get the blend of all the different asset classes, and you have to manage that blend,
because different asset types of different risk profiles on the way through, but it’s absolutely certain,
and it’s been picked up in the press more and more now about sequencing risk, volatility drag.
You’ve got your pound cost averaging when you’re accumulating, and then you have your pound
cost ravaging when you’re decumulating, and that’s if you take your money out at the wrong time,
you compound any loss. If you’ve a 5% investment fall and you take 5% income, that’s 10% away,
but it takes more than 10% to get you back. So if you start your income journey with some serious
investment falls then you can never get back from that.
The dangers of pensions liberation
PRESENTER: Okay and a couple of minutes left, so I want to move on to the final topic of the danger
of pensions liberation. We’ve heard all this talk, Steve, about access pension. It’s all very positive,
shackles are off, but at the same time we’ve got the FCA producing documents saying beware of
scammers. Is there a danger in all this that this idea of pensions, the liberation pensions can give
you and pension liberation which is if you like aka scamming get blended together and a lot of
people lose out?
STEVE MARTELL: Yes, I mean if you think about some of the things that people have been offered,
you know, storage schemes, Brazilian rainforest schemes etc., that sort of stuff is frightening. And
what’s behind these investments, it is potentially very worrying. But there are so many issues for
people to be able to comprehend that people don’t necessarily engage or connect with their pension
plan in any way. So the gap between what they know and what they need to know is quite
So the need for education here is very very significant and that education is best provided by an
adviser. You know, if an adviser can have a conversation with the client, then being able to take
them through what the options look like, take them through the points of their decision making, the
consequences of their decision, what that might lead to, what are their objectives etc., it’s a really
really important time for them to think about what they really are trying to achieve with their
pension pot. And just to be able to take the money out because you can isn’t necessarily the right
PRESENTER: But is there a danger with all these freedoms that the cost of negotiating these
freedoms and making the right choice just ends up outweighing the benefits? You know, you look at
it and think do you know after ten years look at it and think I’d have just been better off taking an
LES CAMERON: The cost of advice could drag down the ability to fund your retirement depending on
the size of your pot, that’s a given. This pensions freedom scamming thing, I don’t think it’s a
pensions problem. I was speaking to somebody at the weekend who had bought a commercial
property to fund their retirement, because they didn’t like pensions, people were just going to rip
them all out and spend it and stuff. I said so when you get to your retirement are you going to sell
your commercial property and blow all your money on a Ferrari or a Lamborghini? No
So it’s not a pensions problem ripping all your money out and not funding your retirement, it’s a
people problem. Somebody with £100,000 ISA portfolio or £100,000 pension portfolio, it’ll be the
type of person that determines how fast they go through that money. But in reality I suppose the
pension might be the only access to capital people have, so they could be a target for scammers who
encourage you to take it out and have a Brazilian rainforest or a bit of land banking in Abu Dhabi or
wherever, so I think you just have to be careful. The general rule is if it’s too good to be true, be
PRESENTER: Probably is. Okay, well we have to leave it there, but before I go I would like to get a
final thought from each of you, just one sort of key point you think from today to leave with people
if they’re thinking about meeting client objectives in retirement. Steve Martell, let’s come to you
STEVE MARTELL: I think the important thing is to deal with someone’s capacity for loss, and that
means identifying what their expenditure is and i.e. their personal minimum income requirement,
and then finding a solution that’s acceptable to the client to actually create that income before then
moving on to look at any other potential solutions. If everyone does that then we’ll be in a good
LES CAMERON: Point number one save more. Pensions are really good, the total freedom makes
the pensions wrapper the best accumulation wrapper available. Get advice, save more. And when
you get to the point of accessing your money, there’s no risk-free retirement, you’re going to have to
pick the risks you’re willing to take, and the best way to pick the risks you’re willing to take is to do
that in conjunction with a financial adviser.