Where are you on the Dunning-Kruger competence curve on retirement income planning? I ask because there has been a lot of change and rapid evolution in a short period which may have you doubting your expertise.
Pension freedoms, coupled with the growth in the retirement lending market, and the introduction of Retirement Interest-Only (RIO) mortgages have undoubtedly changed the retirement landscape.
But what did pension freedoms actually change? Income drawdown was available before pension freedoms, it was just there were limits on the income that could be drawn, or a minimum guaranteed lifetime income had to be evidenced if those limits were to be ignored. All pension freedoms did was to remove those restrictions; the principles of drawing down wealth did not change.
Yet we saw a seismic shift from annuity purchase to income drawdown. We are told that if people do not want annuities, they want guaranteed income for life. The FCA has expressed concern about the lack of product innovation since pension freedoms.
What are the FCA looking for? Do they want actuaries to behave as investment managers and investment managers to create products that rival annuities? This overlooks the changing consumer – the person who is approaching retirement, transitioning into retirement or has retired.
The majority of a person’s wealth at the time of retirement usually consists of pensions and housing wealth. On average the amount of pension wealth represented by defined benefit pensions is declining. For many the amounts in their defined contribution pension pots is insufficient to provide the income they desire over the remainder of their lifetime. Unlike pension products the number of new later life lending products is growing exponentially.
More people are having to turn to their housing wealth, be it through downsizing; interest-only mortgages or equity release. This then introduces new retirement income patterns that affect pension drawdown and constrains the use of annuity products.
Therefore, should the order actually be the tax-free element of pension savings, then the proceeds of downsizing followed by the taxable element of pension savings? If this is the order now, then it might explain why tax-free cash and no income is a popular pension freedom option.
Another order could be to take the pension for a fixed period, say 15 years, then rely upon equity release for the remainder of the individual’s life. You might have noted that neither of these options depend upon lifetime income from the pension pot.
We are also seeing an evolution in consumer behaviour. The changes to State pension age and the removal of the default retirement ages have changed the ages at which people are retiring. The biggest increase in employment activity is among the over 55’s.
Retirement now means different things to different people. People are also moving into retirement and out again. This is not only because of their financial needs but also social needs drive a lot of behaviours.
I know an ex-sales director who has taken up employment three days a week as a car park attendant at a local tourist attraction. He loves the social interactivity. What’s more he receives a reasonable additional income that means he does not have to draw so much income from his pension pot.
You may have noticed that the age of supermarket check-out assistants seems to be increasing rapidly. Ageing may no longer be measured by policeman getting younger but by you being closer to the age of the person you see at the end of your weekly shop.
So, if the way people plan for, transition into, move into and out of retirement is changing, then it’s clear that ‘off the counter’ solutions will not work for them. What they require are flexible, adaptable solutions with reviews whenever changes to their situation occurs.
To keep this article simple, I have restricted retirement wealth to pension and housing wealth. ISA wealth is growing fast and will get a boost if there are constraints on pension tax relief. If someone has £250k in an ISA, for example, how will that be factored into their retirement plan?
Left to their own devices, consumers will use employment income, housing wealth, pensions, ISAs and other assets either sequentially or in tandem. They will still however require advisers who can steer them through the minefield this creates.
All this brings us back the Dunning-Kruger competence curve. Many novices are over-confident about their competence. More experienced experts are often less so. They know what they don’t know and fear other unknowns – life is a continual education for them.
Experts in the later life market probably feel that so much is changing that we are on the verge of a new world. They may feel they will never be an expert on everything to do with retirement but that’s not the case. An understanding of the ongoing changes is a good base point to work from, and an acceptance that everything will change and you have a duty to keep up, will also ensure you are in a strong position to support the needs of your clients now and in the future.
Bob Champion is chairman of the Air Later Life Academy