One of the most popular items in our house over Christmas is ‘Bob’s Bubble and Squeak’. It has become a tradition that you must be at Bob’s house for Boxing Day lunch to ensure you get your share.
The recipe is very simple – the vegetables left over from the Christmas Day dinner mashed with grated cheese and eggs and fried. The ingredients vary from year to year. Although I deliberately cook more vegetables than required for Christmas Day, you never know who is going to eat what and what the leftovers will consist of. Sometimes, I find that some vegetables were so popular that I need to cook some more to give the ‘recipe’ balance.
However, despite the variable ingredients it always seems to be a success. Maybe it’s my ‘mashing’ technique.
During our working lives we accumulate a variety of ingredients that can be used to fund our retirement income. The focus is normally on pension savings but often these are inadequate to fund the desired retirement lifestyle.
A majority of retirees, for instance, will have accumulated housing wealth. They may also have money put aside in ISAs. While working they could have accumulated shares in their employer as a result of a SAYE share save scheme. Some may still hold shares from privatisation and demutualisation schemes or from dabbling in the stock exchange themselves.
Then what about that Insurance Bond they purchased? To add a bit of spice they may hold alternative investments such as fine wine and works of art.
As can be seen, everyone’s retirement income ‘bubble and squeak’ ingredients will be different. So will their spending requirements that will drive their retirement income needs. Factor in health, personal circumstances and attitudes, and every individual retiree will be different.
Apart from the income generated by the wealth held, assets will need to be sold to meet their income requirements. Many unadvised clients will go to their pension first but is this the correct solution for them?
For example, pension income is taxed. If I need to spend £20 and I am a basic rate taxpayer, I have to withdraw £25 to ensure I can pay the tax on my withdrawal. A higher rate taxpayer has to disinvest £33.33. Should I disinvest another ingredient that will not attract tax? Is it not better to leave that ‘tax’ invested in the tax-advantaged world of pensions?
ISA withdrawals are tax-free, so to spend £20, I withdraw £20. There is also the use of Capital Gains Tax allowances. 25% of pension withdrawals can also be tax-free; more if a protected tax-free lump sum can be used.
On average housing wealth is often greater than pension savings. Not all of it can be used as you still have to live somewhere. Does the retiree want to remain in their home, or do they want to move to a smaller, or retirement, home?
If a house move is planned, when is it likely to occur? An injection of capital will affect the balance of the ‘bubble and squeak’ ingredients and will require a rethink as to how the then available ingredients will be used. Similar situations will occur if an inheritance is received.
If the plan is to remain in the house, equity release may have to be used if other wealth is insufficient to sustain the retirement income needs. Again, when and how will this be used?
I have not touched upon estate planning, wills, powers of attorney, costs of funerals which will also require consideration and possibly review.
As already mentioned, the ingredients could change due to a house sale or receipt of an inheritance. Other matters can also change, for example, a deterioration in health or a need for care, resulting in a change of objectives for the individual. The consequences could be an increase in the spending of the individual requiring a change to how the available ingredients are to be used.
Retirement income planning is a little like Bob’s Boxing Day ‘Bubble and Squeak’. The ingredients are never the same, but the chef gets the best out of them. That is what a retirement income adviser does, and it is what makes the role so interesting. Make sure as wide a number of individuals are aware of what you can rustle up – after all, a retirement adviser isn’t just for Christmas.
Bob Champion is chairman of the Air Later Life Academy