1. The layers of income strands in retirement
2. The necessity to consider tax
3. The flexibility that is required to cope with changes in clients' circumstances as they pass through retirement
PRESENTER: In this learning module on Akademia, we’re going to be looking at retirement strategies for income in the light of the pension reforms. Our tutors are Jan Holt of Just Retirement and Richard Sheppard of MetLife. Let’s just run through what they’re going to be covering.
First of all, Jan Holt is going to discuss the new state pension: what it is, what clients think they’ll get and what might impact the actual amount; for example the impact of having been contracted out. After that Richard Sheppard will look at tax in retirement, and the fact that once income needs are determined tax sits at the top of many agendas. He’ll also look at how death benefits as well as in-life benefits become increasingly important, and also how educating ageing clients on how to cope with the absence of a regular income becomes vital. After this I’ll bring Jan Holt and Richard Sheppard together in the Akademia studio to discuss the practical implications of their initial presentation.
We’ll be covering: what does the new state pension mean for advisers and where it fits in the retirement income mix; what else makes up that income mix; annuities and turning capital into income; the personal minimum income requirement, PMIR, budget planning and guaranteed income; balanced decision making and the need to consider possible care costs; the U-shaped retirement and what it means for income. We’ll define income and then consider four what-if scenarios. The scenarios are: what is your client lives a happy and healthy life until a sudden death in a few decades; what if they die tomorrow; what if they become ill and need to make some withdrawals or changes to their income; and what if they simply change their mind and want their cash out.
First of all then, Jan Holt.
JAN HOLT: The introduction of the single tier flat rate state pension in April 2016 was designed to bring about a new era of pension simplicity whilst offering a fairer deal to the UK’s retirees. The new state pension rate of £155.65 per week from April 2016 is on the face of it an improvement on what most people are expecting to receive. However, there remains a real concern that many people will end up receiving much less than this, and as a result it could have implications for their financial plans given the extent of pension freedoms available. The factor that many retirees will struggle to understand is the impact that contracting out will have on the amount of state pension they’ll receive. Any calculations to establish their state pension will include a deduction to represent the period the individual was contracted out. This is designed to allow for the reduction in national insurance payments that the client would have benefited from whilst they were contracted out.
The statement pension age or SPA has undergone radical change since April 2010, and we’re currently seeing women’s SPA being aligned with that of men’s at age 65. This exercise is due to be completed in November 2018 with further increases set to raise the SPA for both men and women to age 66 between November 2018 and October 2020, and then again to age 67 between 2026 and 2028 for both genders. Periodic reviews of the SPA were first introduced in the Pension Act 2014, and they’re aimed at maintaining a set portion of adult life as being in receipt of the state pension, so that’s linked to life expectancy. The first such government review is due by the 7th May 2017. Those people whose SPA falls on or after 6th April 2016 will be entitled to a state pension under the single tier scheme rules.
So how does it work for them? First of all here’s a quick recap of how basic state pension was made up prior to April 2016. There are three elements. First a basic state pension calculated by crediting each qualifying year of national insurance contribution at one thirtieth of the full amount. The full amount was earned with 30 qualifying years, and once in payment this increases each April in line with the triple lock of the greater of either average earnings, the consumer prices index or 2½%. Next an additional state pension comprised of the state earnings related pension or SERPS and state second pension or S2P. The calculation of this entitlement is complex. Some individuals may also have accrued graduated retirement benefit, a forerunner to SERPS. And the third element contracting out of the additional state pension, this applies between 6th April 1988 backdated to April 1987, and 5th April 2012 on a defined contribution basis, or from 6th April 1978 to 5th April 2015 on a salary-related basis.
The new single tier pension replaces the basic state pension, the additional state pension and any age addition. It also replaces the savings credit element of pension credit. So that was a benefit for people on lower incomes. And finally it replaces the category D state pension which was a non-contributory pension for those aged over 80 who met eligibility criteria and either had no state pension or a state pension less that the category D amount. For those retiring after 6th April 2016 the single tier provides a flat rate. The maximum amount is set at a level above the single person’s pension credit or guarantee credit. This figure doesn’t include any adjustment for contracting out or for those with a protected payment. The government committed to ensure that nobody would be worse off under the new state pension arrangement. Anybody with an existing history of NI contributions at April 2016 will be entitled to a foundation pension equal to the higher of their entitlement under the new and existing rules.
So the amount of state pension payable to an individual retiring after April 2016 is based on a two stage calculation. First of all the pension amount based on the old system, i.e. basic state pension plus SERPS and S2P minus any contracted out deduction as at April 2016. Secondly the new single tier amount, i.e. the number of qualifying years multiplied by one thirty-fifth of £155.65, minus any rebate driven amount, which is similar to the contracted out deduction. The individual’s foundation amount will be the higher of these two figures once the calculation has been done. The pension must increase in payment at least in line with earnings; however current government policy is to extend the triple lock to the single tier pension until at least 2020.
If the entitlement under the old regime is higher than that from the new regime, the higher figure will be paid but the difference is classed as a protected payment. And the difference will only increase in line with CPI as opposed to the triple lock. Entitlement will be assessed on an individual basis without the facility to inherit or claim national insurance credits from a spouse or civil partner. To qualify for the full level an individual will have had to have paid or been credited with 35 qualifying years of NI contributions. That means that each qualifying year of post April 2016 NI contribution or credit would accrue an additional £4.45 per week, so that’s £155.65 divided by 35, up to the maximum. However to qualify for any entitlement an individual must have at least 10 qualifying years either through a combination of pre- and post-April 2016 and/or voluntary national insurance contributions.
If you’re interested in the full technical explanation of how the new state pension works, including a closer look at the impact of contracting out, a Just Retirement technical bulletin breaks down some of the complexities of this topic and it will help you provide your clients with a better understanding of their entitlement under the new rules. You’ll find a link to this below the screen. Given the stages involved in calculating the foundation amount, particularly for those who’ve been contracted out, the practical way for many people to get a realistic understanding of their entitlement is to request a BR19 pension statement from the DWP’s future pension centre.
As ever the attempt to deliver a simple and straightforward retirement planning solution often contains plenty of technical concepts for clients to grasp and to navigate through. Whilst pension reform may bring greater choice, it also brings greater complexity, and as a result professional advice will be of even greater value when helping clients unravel the detail behind their choices.
PRESENTER: And now let’s hear from Richard Sheppard of MetLife.
RICHARD SHEPPARD: So one of the challenges that we’re having post pensions freedom is the way that retirement needs to be reconsidered, and what we need to start to reconsider is the strategy that individuals approach. We’re seeing more and more advisers concentrating on the tax issues in retirement. And we’ve used this phrase of the tax tail and the dog, and I think now the tax tail is actually starting to control the dog for the right reasons. You’ve got individuals now with many different asset portfolios as they hit their retirement age, and it’s an adviser’s role of course to consider the most appropriate extraction route.
Now, when you consider tax, whether it be capital gains tax you’re playing income against, or what isn’t actually income, it’s withdrawal of capital into the home or an income tax strategy, it’s the way that then plays not against just the allowances but against say some of the death benefits that are left behind when the ultimate happens. Because the death benefits are now becoming an integral part of a retirement strategy, making sure the right pot of fund is drawn down, so that when the ultimate happens as I say, death, you’ve got sufficient funds in the appropriate strategy to mitigate any inheritance tax issues. And that causes a number of concerns, and it’s a learning process as part, for the consumer as it is for the adviser. We’ve become very adept at dealing with the in-life, in-retirement benefits, looking at what income is required for various different circumstances, but what’s being driven out by an awful lot of the research, certainly the research that we have done at MetLife, based on the Exposed Generation, is what clients are starting to realise there is an expectation of in retirement, such as care.
Now it’s very easy to talk about care, but what does it actually mean? How do we facilitate care within an advice process, within a product selection process? And it’s what’s becoming very obvious is the selection of the product at or in retirement to achieve those in-life benefits becomes very relevant in the later life world, and extremely relevant in the death benefit world. And then of course we need to consider if a client changes their mind, or probably more importantly in life circumstances forces a change of plan. And this is where we’ve got to start considering at what point we re-educate the client, or a client becomes re-educated.
There was a discussion paper issued by our regulator in March around the ageing population and how we advise them. One of the key considerations it talks about in one of the chapters is how we re-educate the human brain to deal with the cessation of a regular income that you achieved during work. And it’s very simple to budget for many individuals. Once you have a regular income coming in, you’re easily able to budget towards the next pay period. When you’re in retirement that decision process is slightly more difficult. That budgetary process is more difficult. Because if you do not secure a regular income over and above the state pension, and you’re drawing down off of one of the asset portfolios that you have, subject to the good advice you’re receiving, you’ve got to ensure that the pot of money that you’re left with, in whichever wrapper you’re drawing from, is going to live and last as long as you.
Because the last thing a client wants is to reduce their spending on an expectation they’re going to live and then they die early, or spend and then live, and they could end up in a situation where they’ve outlived their savings – something that we’ve talked about a lot in this wonderful world of financial planning over recent years, but it’s now becoming a far more serious consideration.
PRESENTER: Those pieces were recorded earlier. We’re now going to bring Jan Holt and Richard Sheppard into the Akademia studio.
Jan, let’s come to you first of all then. In practical terms, what does the new state pension rules mean for advisers?
JAN HOLT: Well first and foremost there’s a huge need to educate their clients. Because recent research from Which actually tells us that less than one in five over 50s actually know what their state pension age is, only one in five knows whether they’ve ever been contracted out and only one in five think that they’re likely to be affected by the new state pension, and of course anybody over 50 will be, so education first and foremost. And there is actually a really good resource pack available from the Government, which includes things like leaflets, articles, even little snippets to push out through social media, and lots of useful videos explaining all about the new state pension. And that’s available on Pension Tube.
So, on an educational level I think there’s lots of support available, but primarily what advisers need to help their clients work out is whether they not only understand that state pension but are maximising their ability to get as much as they can.
PRESENTER: When to take it and maybe when to defer it.
JAN HOLT: When to take it, when to defer, whether to make voluntary additional national insurance contributions to boost state pension, and of course for those who’ve been carers or on certain types of benefit, whether they’ve got all of the national insurance credits that they’re entitled to. But whether to defer state pension is an interesting conversation that advisers will be having with clients as they start to think about what happens when they reach state pension age.
PRESENTER: We’ve got a slide on that. Let’s just talk that through that slide briefly before we bring Richard in.
JAN HOLT: I think state pension deferral has always been available; however the rules changed as of April 2016. So it’s important to note that when you do defer taking your state pension, then the interest rate on the amount you defer is now 1% for every nine weeks in deferral, or essentially we’ll call it 5.8% for every year. So we’ve got an example here of David. His single tier pension calculation tells him he could have £5,200 a year, but if he defers, say he defers for four years, then he’d get £300 a year extra so in total £1,200. But there’s a minor point to note here, which of course is that 5.8% interest is a simple interest calculation. So you have to take into account that if we had inflation at 2½% over those four years, then the real value of his deferred extra pension is actually down by 9.4%, so it’s down to just over £1,080.
PRESENTER: You used to be able to take a lump sum.
JAN HOLT: You did. You used to be able to commute deferred amounts into a lump sum, and that option is now not available from April 2016.
PRESENTER: Richard, how au fait if I can use that old fashioned term do you believe advisers are with these new state pension rules, and how are they putting them into practice?
RICHARD SHEPPARD: Well I think it’s a massive learning curve as Jan mentioned. This change is far more in-depth than it appears on the surface. The first point of principle that we need to understand is a state benefit is in my opinion a very undervalued benefit, because you see it in a weekly amount. You then start to factor in that weekly amount to annual amount, and then look at how long you’re likely to receive that income for, and then you quantify how much it would cost you to buy that in an external source. You know, the numbers are quite astonishing.
When it comes to advisers and their way, in terms of how au fait they are with the changes, I believe that many are becoming more au fait – I’m trying to be as careful as I can with my words – but I think there is still, I think probably not enough. Because it looks simple and it should be simple, but I think anybody that is able to reference the study book RO8. There is a fantastic chapter in there around the changes to the state pension, and also using the resources that Jan’s alluded to, to allow individuals to find out what the impact is.
PRESENTER: So advisers should never move on with a client talking about retirement unless they’ve got BR19 in front of them, is that right?
RICHARD SHEPPARD: Definitely.
PRESENTER: That’s a good starting point.
RICHARD SHEPPARD: First point in the conversation.
PRESENTER: Do you see the state pension as that sort of first layer of income in the retirement mix?
RICHARD SHEPPARD: I think it certainly should be that level. You know, forget all the study manuals. I think the state pension is there as an overarching benefit, and it should be the first layer of income planning when it comes to an individual’s retirement needs. So quantifying how much that is then allows you to build flexibility around the other assets that a client has to meet their needs and objectives into their retirement.
PRESENTER: Are you finding when you’re talking to advisers that that’s how they’re seeing this as the first layer of the income mix?
JAN HOLT: Absolutely, because for advisers it’s a simple thing to do in the planning process to get the client to think about a budget, and budgeting for what their income needs are likely to be. Now that’s easy for the adviser, but for some clients they might need coaxing towards that, because of course they may not actually see some of their other pensions as forming part of replacement income. You know, they might well be under the impression that state pension will suffice, or they may have some defined benefits, and they’re just two of the layers. So helping a client work out what they do with the rest of their pension assets requires some good budgeting.
PRESENTER: And of course the state pension is a guaranteed income. I reckon that’s pretty unusual in this day and age. We’ll come on obviously to mentioning annuities in a moment. Talk us through the other things that make up the income layer, the income mix then, Richard.
RICHARD SHEPPARD: Well you’re exactly right: the state pension forms that baseline; that guaranteed income in retirement. What clients are then doing, in the old world, let’s call it the old world, you know, there might be a pension that’s been built up through their working life and you would convert that into a guaranteed income source, which we now know of course is called an annuity. And once bought it’s fixed and it’s set. Since pensions freedom came upon us in April of last year, April 2015, we’ve now seen an element of flexibility being brought to the masses, and what we’re also seeing as part of a client’s retirement strategy is the use of other assets. So their ISA, their cash deposits, their other investments being used. And the phrase that I like to coin is we used to have the tax tail wagging the dog. I think now the tax tail is starting to control the dog, and where we’re having an adviser who is looking at a client’s complete asset portfolio and is looking at drawing down the relevant asset to control the tax paid by a client.
PRESENTER: The state pension is not tax free.
RICHARD SHEPPARD: No, it’s income.
PRESENTER: Exactly right, and quite often people think of it as I’m going to get that money, but then there’s all these other pots.
RICHARD SHEPPARD: And the advisers are becoming, as they always have done, far more adept at challenging their own knowledge around the tax tools available to ensure that they’re playing the capital gains tax allowances against the income tax allowances, but also considering the inheritance tax consequences of what happens when the client dies.
PRESENTER: OK. We talk about it being the decumulation phase for people, that awful phrase, but it’s really about turning capital into income, is it not Richard?
RICHARD SHEPPARD: Oh it is yes, without a shadow of a doubt. And this is really one of the educational points that the brain is not that au fait with. Because many of us in work receive a regular payment, whether it’s weekly, whether it be monthly, whatever it is, and we’re very good at budgeting, but turning saved capital into an income stream. It might feel like income in the eyes of the client, but what it really is is repayment of capital, drawdowns on a balance. And that is very difficult to work out how long you need to get the balance above zero, because you continue to drawdown hopefully until you die. But if you die too early or die too late that can have dramatic consequences. So budgeting becomes important.
JAN HOLT: It is important, and I think once you’ve created that budget then I think one of the other considerations within the advice process is how do you lock down somebody’s personal minimum income requirement?
PRESENTER: The PMIR.
JAN HOLT: The PMIR. So we used to have a legislative need to have a PMIR if you wanted flexible access to your funds, but we don’t have that now. But for me it’s prudent for advisers and clients to have that discussion, because it also helps inform capacity for loss. So for example if we’ve got a client who is wanting some good freedom and choice with their pension, but actually they can’t generate sufficient income to pay the bills, then they don’t have the capacity for loss to then go and take investment risk with any remaining funds.
PRESENTER: That’s interesting. That’s at least a couple of things that used to be enshrined in legislation, was it the GAD rates? The government actuarial department rate, which is a great calculation to help people understand how long the pot will last, and you’re now saying the PMIR is an important thing that people should look at.
JAN HOLT: Yes, and that goes, it takes a slightly different complexion to GAD rates because it’s personal to the client, so it’s looking at what each client’s income and expenditure is. But it’s also giving the client the ability to tag their expenditure as either essential or discretionary, which helps build up a picture of which are the assets that we need to generate guaranteed income for life with, and layer up those state pensions, defined benefits, and which are the assets that we can be more flexible with?
PRESENTER: That’s a really interesting concept, guaranteed income for life Richard.
RICHARD SHEPPARD: Well that would be, if you could find it somewhere that would be fantastic wouldn’t it? And of course ensuring that your income for life is what really underpins the annuity philosophy. It is an insurance policy against your income running out, and of course if you buy an annuity it doesn’t. That’s one of the benefits. There are other products such as we offer at MetLife that will do that as well with additional flexibility. And that’s all of what’s coming to the fore now with pensions freedom. A lot of advisers and clients are waking up to the new propositions that are around, to take into account life events. Because somebody retiring at 65 in reasonable health now, you know, chances are if you look at the tables they’re going to live several decades.
PRESENTER: 30 years.
RICHARD SHEPPARD: Things can change.
PRESENTER: Yes sure, absolutely. Is it true that a lot of advisers see things from an adviser’s point of view and not a client’s point of view, and how important is it to see it from a client’s point of view Jan?
JAN HOLT: I’m not sure that’s necessarily true, but I think the thing to bear in mind with the client is that they will tend to think about what they’ve got and what products they need to use to create the retirement solution. So they might come at this product first, and they may be specifically polarised towards either being in drawdown or being in an annuity, and either not appreciate that there are other solutions that aren’t quite the same as either/or, or that they don’t have to do one thing. So I think from an adviser’s perspective what’s important is to prepare the client to think about having that longer term plan, so that 30-year retirement plan, and think about what are the needs for the client both short term, medium and longer term, and then construct a plan to cater for those. So the product solution comes last.
PRESENTER: Product solution comes second. You and I know over all these years advisers are resistant to that if you’re not careful.
RICHARD SHEPPARD: That’s right yes.
PRESENTER: So we’re saying needs and benefits have to come first and the product second.
RICHARD SHEPPARD: Exactly right. Jan’s exactly right. From a client perspective they think they believe they know what they want. The adviser has to validate it and push back all the time, because they can see the broader picture. Clients, human being, the brain tends to be very now focused in the majority of cases. But of course the advantage of engaging with a professional adviser is because of their training, because of their skills and because of their experience they look at the broader picture and consider all of the what-if scenarios.
PRESENTER: What is a U-shaped retirement?
RICHARD SHEPPARD: Now that is a philosophy that’s been around for many years, and it’s something, it’s probably exactly what we’re talking about needs to be considered. Because the typical would be I’m sat at my retirement party on a Friday, and what I’m expecting to achieve is a weekend off and then I’m going to be very active for the early years, because I’m going to do all the things that work stopped me from doing because of time constraints. I’m then going to, after I’ve finished all of that I’m going to start go over the activity schedule and potential spending schedule into my later life. There’s no determinant as to how long that is, but I start to become less active, I’ve enjoyed all my experiences. My spending will maybe retrench, and then I move into my later later life and I start to enjoy maybe some care needs. And unfortunately the ultimate happens and I pass away.
PRESENTER: That seems a sensible scenario. You’re slightly cynical of the concept, Jan?
JAN HOLT: It’s not so much cynicism as that I’m not sure it’s actually ever been proven. I don’t think there’s anybody who’s tracked specific cohorts of retirees to see what their spending patterns actually have been. However we did see some research from the International Longevity Centre late last year that suggests that actually in mid to later retirement, so the tipping point I think was around about sometime between 70 and 74, when whilst consumption did decrease saving actually went up. And the drivers behind this were either things like being in poor health so being unable to spend as much, changes in preferences for goods and services that people buy, but actually one of the key drivers was the thought process around now I need to accumulate some money to leave as a bequest. But that’s simplifying it, there are lots of different scenarios, and I think Richard’s got some.
PRESENTER: And you have four scenarios.
RICHARD SHEPPARD: Yes, I mean again these are all theory based, but one of the things you need to consider is you’ve got the U-shaped retirement which looks at spending, and then you’ve got the inverted U which looks at activity. And it’s in the later life bit as you become less active as you move into care, that’s where your spending could go up because of other needs. So what we want is typically somebody who follows a plan. If everybody follows a plan we’re all happy. Because the typical plan is you define the strategy close to or at retirement where they go into this activity curve and spending curve, and the product selection process follows it. Sometimes activity, sometimes events happen. And what is the client leaves your office and passes away over the weekend? The plan is thrown into absolute chaos.
PRESENTER: Scenario one, what if I die tomorrow?
RICHARD SHEPPARD: What if I die tomorrow? Second is what if I don’t die for many years? I mean the expectancy is 30 years and I live for 50.
PRESENTER: And a happy and healthy time as well.
RICHARD SHEPPARD: And are happy and healthy, what happens there? What are the consequences, the impacts? What if something outside makes a decision need to be changed?
PRESENTER: So if you become ill for example.
RICHARD SHEPPARD: So I could become ill, exactly. And that illness could trigger a power of attorney. So the decision process becomes outsourced to somebody else, and the adviser needs to consider their influence, their relationship with that individual who’s now making decisions on behalf of your client. And the final one is, do you know what, I’ll invoke my human right to just change my mind.
PRESENTER: I’ll take my money.
RICHARD SHEPPARD: And I’ll take my money. So how does the product selection process that we’ve all grown up with and we’ve all experienced through our further experience qualifications and legislative adaption, how can all of that cope? So the product selection, whilst it is never the start point from an advice process, it becomes increasingly important to embrace flexibility, freedom and choice.
PRESENTER: Because in the old days once you were in an annuity that was it.
RICHARD SHEPPARD: That was it.
PRESENTER: One decision and one decision only.
RICHARD SHEPPARD: That certainty cost you choice.
PRESENTER: So what are the sorts of strategies for overcoming those different requirements?
JAN HOLT: Well I would still argue that the need to lock in guaranteed income to cover the essentials should be in place. Because regardless of most of those scenarios the bills still have to be paid, and so we need to make sure that that’s still happening. But for the rest I think it’s coming back to this concept of trying to help the client adopt a 30-year plan if you like, or 30-plus-year plan for some. And whilst that’s easy in theory, of course we don’t know what’s down the line for any of our clients. So it’s just introducing some balance and helping them make decisions with several different outcomes maybe in mind, rather than just have to place all of their money on one bet.
PRESENTER: We’ve got a couple of slides on this to help us through this.
JAN HOLT: We have, we’ve got a few schematics here where I can articulate what I mean here. So it’s about saying to the client it doesn’t have to be just about either flexibility or security, because as we can see on the slide both of those have got upsides and downsides. So it’s really looking at what’s the optimum combination for the client in terms of what they’re trying to achieve. And it will be different for each of them. So do you weight the balance towards security, because this is a client with maybe limited resources, and you give them a little bit of flexibility, or is it the other way around? Do we look at a higher level of flexibility because the client actually when you run all the calculations, and particularly when you use things like cashflow models, you can see that the risk of running out of money maybe is a lot lower and so you can afford to up the flexibility.
PRESENTER: It’s going to be dependent on the size of the pot, is it not?
JAN HOLT: Very much so, yes. But it does give you an opportunity to have the discussion with the client about future-proofing their retirement plan. So again back to what I said earlier, it’s not about one size fits all, or you only have to have one solution; it’s about that range or combination of solutions using all of the client’s assets to help them achieve what it is they’re trying to in retirement.
PRESENTER: It’s interesting that you’ve been able to boil down such a complex subject to two concepts, philosophical concepts, the idea of security and flexibility. Let’s take the third I think of those scenarios then Richard, the business of falling ill both unexpectedly and in a sense expectedly. As you move into your 80s there’s a higher potential that you are going to require care cost, so how do you balance the flexibility and security there?
RICHARD SHEPPARD: Yes, again it becomes the poisoned chalice that nobody really wants to talk about. But care is becoming an increasing issue. One of the problems with living longer is sometimes the body lets you down. It doesn’t mean that your heart lets your down and you don’t pass away, you become slightly ill, and that ill can have dramatic impacts. And you can do this in one of two ways. There is the unexpected of course, and that’s probably the trickiest to deal with in a financial product selection basis. Because if you don’t know it’s likely to happen then you need to build complete flexibility for a whole range of issues and outcomes. If there is an expectation that illness is likely, or care issues might become relevant at a later point in life, such a family history, such as you are just, you’re approaching 90 years old and chances are something might happen to you.
It might not but chances are, you can plan around it. The important point I think Tony, it’s not just to do something about it, the point comes before that. It’s making the right selection of product that can adapt and be flexible with the client’s circumstances, and having that debate and that discussion, not being phased by it as an adviser in front of the client speaking about the wider journey. Because it is unfortunate, if you look at the statistics there are many individuals that are fit and healthy, absolutely fit and healthy. They then go through a point where their brain lets them down, their cognitive function goes. They then move into a world where unfortunately a power of attorney kicks in, because their mental capacity is lost and then they die. Some people are not fortunate enough to enjoy these middle two bits, some would say fortunate enough. They go from being fit and healthy and dead. And you need to have a product which is selected, which can cope with all of those circumstances.
JAN HOLT: What’s interesting in terms of the care conversation with many of today’s retirees is that whilst it’s not the most pleasant or cheerful conversation to have with clients, they’ve actually maybe started to go through it, or been through it already with a parent or relative. And so I think they are now more receptive to understanding the need to think about that in terms of their own financial future. So we meet lots of advisers for example who say well I don’t deal with long-term care planning because I don’t have clients in that scenario. And I tend to think are you talking to your clients about what’s happening with their parents, because probably they’ve got some experience of this.
PRESENTER: Indeed, and the concept of power of attorney is one that is beginning to grow I detect.
JAN HOLT: It’s a fundamental fact find question I think. For those clients who are entering that pre-early retirement stage, do you act as an attorney for somebody else?
PRESENTER: And if you do then you’re likely to be more receptive to plan for yourself.
JAN HOLT: And if you do that somebody else might actually need the benefit of good financial advice.
RICHARD SHEPPARD: Yes exactly right. Part of the research we’ve done, I mentioned the Exposed Generation paper, one of the key expectations, in fact it was the top of the list in terms of expectations of this Exposed Generation, anybody 45 and above, their top expectation is long-term care and unexpected health costs in retirement. So if it’s identified as part of the questioning research process, then how do you build it in? How do you quantify what that actually looks like in terms of a fiscal amount? You know, is that going to cost you £400, £500, £600, £700 a week, will you qualify for central support? How is the Care Act and the care cap which I’m beginning to believe is maybe a myth in itself, but what are the myths that sit around it, and how do you build that into your plan, which then drives your product selection, which then needs to have a contingency.
PRESENTER: The horror that many people believe that the house they could leave to their children, and in fact the house may be simply sold to pay for the care.
JAN HOLT: Well this is the key point. All of the planning that you do in the early years of retirement in terms of leaving that legacy could be blown apart if the client then enters residential care and is there for a very long time, which can happen.
PRESENTER: So how can advisers help clients better understand this decision- making process? What have you got in your toolkit that’s available to help it out? I now understand flexibility and security, that’s a great series of questions to have, but what else have you got in your toolkit then?
JAN HOLT: Well there’s lots of support available across the marketplace generally in terms of what Just Retirement can offer. We’ve spent a lot of time developing a series of calculators, so tools that help bring some of these conversations to life. So for example how long do you think retirement is going to last conversation could be well how long is a piece of string? Unless of course you can access a good life expectancy calculator – and ours will do that, it will help the client understand what the planning time horizon might be. Because it won’t just give them an average life expectancy, it will give them a range of possible outcomes, which helps them understand then the need for both good death benefits if they are in scenario three I think it was, or the need for having some good longevity hedge in place.
RICHARD SHEPPARD: For us what we’ve done is we’ve created a number of calculators. We’re not majoring on the calculators; we’re looking at the educational route. Informing advisers about what the issues are, taking more of a thought leadership approach to it to help inform their debate and their discussion. And ultimately their questioning abilities, not suggesting they can’t ask questions but in terms of asking the right questions. We see a lot of compliance teams tell us that they’ve got the wrong answers. They’ve not got the wrong answers to questions; they’ve maybe asked the wrong questions to drive out the issue.
So it’s around that educational point. And the Exposed Generation report dovetailed with some research that we’re going to be delivering fairly soon around what advisers believe has been the consequence of pensions freedom one year on, we believe that will start to inform the adviser and allow them to ask better questions, and deliver better scenarios and better outcomes.
PRESENTER: In that case all that remains for me is to ask you for one final piece for advisers on this particular area. Let’s just start with you Jan.
JAN HOLT: So I would say engage early. So start to talk to clients about the decisions that they’re going to have to make before they even reach the age of 55. Because then you can get them in a place where they’re thinking beyond just well there’s a desire to take at least 25% cash and I’ll take my chances with the rest. So you can help them make a plan that actually helps them optimise their outcomes in retirement.
RICHARD SHEPPARD: For me it’s about dwelling on the certainty that as you age you want things that are certain. And when it comes to a consumer outcome, a client outcome, delivering that certainty with the product selection, however embracing flexibility as well, so the product selection piece is absolutely vital, so focus on that.
PRESENTER: On that note Richard Sheppard of MetLife and Jan Holt of Just Retirement, thank you both very much indeed.
JAN HOLT: Thank you.
PRESENTER: In order to consider the viewing of this video as structured learning, you must complete a reflective statement to demonstrate what you’ve learned and its relevance to you. By the end of this session you’ll be able to understand and describe the layers of income strands in retirement; the necessity to consider tax; what flexibility is required to cope with changes in clients’ circumstances as they pass through retirement. So please now complete the reflective statement in order to validate your CPD, and don’t forget to watch out for the other Akademia learning modules on pensions.