We are approaching the end of the holiday season. If you have had a well deserved break I hope you enjoyed it. My dentist enjoyed his. It was the first holiday he and his wife have had ‘without the kids’ and he was surprised at how much cheaper it was.
I hear you say, the holiday may have been cheaper but what about everything else the Bank of Mum and Dad are paying for. Did the kids go away? How were their holidays paid for? What about the other financial support he no doubt provides? Let’s not go there as this is intended to an upbeat post holiday article.
When he retires, my dentist will be on a 52-week holiday. Is he prepared for it? If he and his wife treat their new found freedom as a never-ending holiday, how will their spending compare with their current spending? How often will they go abroad? How many short vacations will they take in? What other activities, that they now have no time for, will they enjoy and at what cost? Will their retirement spending actually be less than their spending whilst working?
The active period of their retirement (which I recently saw described as the ‘go-go retirement period’) may be constrained by their energy, not their ability to spend. At this stage I must add that my dentist’s wife is a senior school teacher so without knowing their finances in detail, they should be able to sustain a good lifestyle for many years before having to restrain their spending. They may find that their spending becomes naturally restrained as their lifestyles adapt to their reducing energy, and they enter their ‘slow-go retirement period’. However, they need to take account of the fact one or both of them may need caring for, and the additional costs that will be incurred during the ‘no-go retirement period’.
One role of a retirement income planner is to help clients understand how their spending needs will change over their retirement and how they can compromise and make contingencies for those probable changes.
My dentist and his wife are fortunate. The vast majority of the retiring population are not so fortunate.
When I look at the statistics that are produced by HMRC and FCA in respect of how pension pots are being taken since the pension freedom reforms I despair. Not because of the behaviours being exhibited, which in the main show that many consumers are far more conservative than professionals and regulators give them credit for, but for two other reasons.
My first reason for despair is the small amount of income that many are taking. According to the tables published within the FCA’s data bulletin number 8, approximately two-thirds of those drawing income are taking less than 2%.
The other is the small pension pots that the majority have. Nearly 78% of the pension pots accessed during July to September 2016 had less than £50k in them. Admittedly there could be some duplication in the numbers, i.e. some individuals have more than one pension pot however for everyone that does there is another person who is not in the statistics, retiring with no pension pot.
But let us be cheerful. Why should the people that cause me to despair be denied the ‘go-go retirement’ period that my dentist and his wife will almost certainly enjoy?
Those who are taking too little income need to be informed they can safely loosen up and draw more income. They could safely increase their withdrawals to above 3% and still have a cushion for future inflation and extended longevity. Similarly those with small, or no, pension pots could enjoy life more if they factored in some of their other wealth. Over 70% of pensioners own their own homes for example.
Retirement being a 52-week holiday is not practicable. However, part of the role of a retirement income planner is to help clients enjoy their retirement whilst understanding the risks they are taking. By showing ways in which they could afford to push the boat out more often during the ‘go go retirement period’, they will make their lives more enjoyable. Who knows, this could be good for their health and may even extend their lives. A good financial adviser (instead of an apple a day), could keep the doctor (or dentist) away.
Bob Champion is chairman of the Later Life Academy (LLA)