Remodelling Retirement
The path to retirement is changing… are you?
The modern world of retirement looks different to that of our predecessors. From healthier, wealthier lifestyles and rising longevity, to the declining relevance of social rules that have defined society for generations; the retirement landscape is being remodelled by the individuals living it. This changing environment offers an opportunity for advisers. An opportunity to rethink client communications. An opportunity to stand at the forefront of regulatory reform and ensure clients are prepared for, and able to deal with the realities of modern retirement. Professional Adviser has teamed up with Canada Life to better understand these opportunities and highlight the range of flexible solutions needed to help clients. With exclusive research looking at how new trends are shaping the way people retire, an analysis of the impact of Covid-19 on retirement plans, and a deeper look at future economic policies and taxes that may also impact savers, this guide is a unique resource given the complex market environment we find ourselves in.
Choose a chapter
An introduction to modern retirement
Pensions: From here to….where?
The quiet revolution of new retirement journeys
How should advisers bridge the retirement generation gap?
Retirement post-Covid-19: Let’s get back to the basics
Changing perceptions: How will attitudes towards pensions change over the coming decade?
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Today the majority of advisers’ business models cater to retirees that have benefited from strong financial foundations and generous pension allowances. This may not be the case in years to come. Moreover, retirement in the future will be influenced by the fact individuals are living longer than ever before, are healthier, and may not want to stop working at 65, Canada Life’s Nick Flynn tells Professional Adviser.
“Different retirement journeys mean a variety of income solutions are needed," adds Flynn. "It is not just about an annuity or drawdown anymore, but a blended approach using all assets available to generate income.” It also means solutions need to be tailored to individual retirees in order for advice to remain relevant. The era of retirees relying on a defined benefit pension for example, is drawing to a close, and now more than ever before there is a risk that individuals are facing a poorer retirement. So the need for targeted and appropriate advice is growing.
Although traditional target markets haven’t necessarily changed, modern life has, which is creating different opportunities for advisers. Nick Flynn, director, retirement solutions, Canada Life
Defined benefit pensions were hugely generous in the past and many employers have understandably backed away from that cost. Andrew Tully, technical director at Canada Life
Tully believes people approaching retirement in a decade or so will likely have less savings than their parents, yet they are likely to live longer as well. Therefore, there is the notion of working until they are older, taking on part-time work in retirement to bridge gaps or even acceptance that there will be less money in your later years, he says. “These journeys are constantly evolving and advisers will need to evolve their solutions to ensure core client challenges are met.”
Educating advisers and the public will be key in this new era of modern retirement, according to Neil Jones, tax and estate planning specialist at Canada Life, especially as clients tend not to like being put into predefined ‘boxes’. Increasingly, they are seeking a more bespoke approach on how to manage their money. One challenge will be the need for advisers to work with clients earlier in the savings and investing process, ideally by seeking IFA advice. “The adviser market is an ageing market, so numbers have been reducing, compounded by regulation making it financially difficult for some firms to remain financially viable,” adds Jones. “The public is also becoming more financially aware, with the sharing of information online allowing people to learn much more quickly. This technology will be key as younger generations will want more online ability and will probably rely less on face-to-face transactions."
There is a need for advisers to work with clients earlier in the savings and investing process, if they want a comfortable retirement. Neil Jones, tax and estate planning specialist, Canada Life
The need for advisers to support clients through these changes has never been so important. Indeed it is essential for financial advisers and wealth managers to lead positive change by thinking about future generations today, and ensure there is a range of flexible ways to access advice and solutions. Sean Christian, MD and executive director, wealth at Canada Life UK, says: “At Canada Life we’re entering an ambitious growth period and partnering with advisers to create the financially secure retirements of the future is a big part of our vision. It’s no secret that ‘retirement’ will mean something very different in 20 years’ time and we want to work alongside advisers now to support them in future-proofing their business.”
Pensions: From here to… where?
"These journeys are constantly evolving and advisers will need to evolve their solutions to ensure core client challenges are met.”
“People approaching retirement in a decade or so will likely have less savings than their parents, yet they are likely to live longer as well. So, there is the notion of working until you are older, taking on part-time work in your retirement to bridge gaps or even acceptance that there will be less money in your later years."
Neil Jones, tax and estate planning specialist at Canada Life
Pensions: From here... ...to where?
There have been a number of changes to the retirement market over the last few years; not all of them good. While the advent of auto-enrolment in 2012 and pensions freedoms in 2015 have had the biggest impact on people’s retirement plans, each have had some negative consequences. Professional Adviser delves deeper into how these changes have impacted the sector.
Pension freedom
The biggest and most worrying change following pension freedoms is the ability to take your pension pots as cash Nick Flynn, director, retirement solutions, Canada Life
"Now that’s absolutely fine for the smaller levels, but the FCA produced some stats recently that showed between April 2019 and March 2020, 375,500 pension pots were fully withdrawn. Obviously, a good chunk of those were very small pots, and there is quite a large amount valued between £30,000 and £100,000."
375,500
the number of pension pots that were fully withdrawn between April 2019 and March 2020 (Source: FCA)
As a result, many people are considered higher-rate taxpayers when they withdraw those amounts and put them into their bank accounts. Flynn believes part of the reason for this is the lack of access, or desire to seek, professional advice. “Just by doing it over two or three years or buying a fixed-term annuity or low-cost drawdown, they could have got that money out with very little, if any, tax. It’s a real shame that that’s happened and it’s just down to people not taking advice,” he says.
0
£30,000
£250,000+
Pension education
An increased effort to educate retirees would help solve this problem, and that is being partly addressed through the government’s Pension Wise service. However, the industry could also be doing more to help advise retirees how to get the most out of their pensions. “People may well be paying a year’s worth of salary in tax. As an industry we should be trying very hard to help people navigate round paying unnecessary taxes, especially at the very point that they get their pension,” says Flynn. This lack of advice also reflects a trend for the wider industry, with many financial advisers retiring and not enough new blood entering the sector. “I think the pure lack of advisers has been a challenge. And there are a lot of organisations that no longer offer advice,” he adds. “There are still plenty out there, but in this environment it’s difficult for clients to get involved with advisers and vice versa.”
RDR impact
It’s not all been bad news, however. The Retail Distribution Review (RDR), which came into effect in 2013, sought to improve transparency and professionalise the retail financial services industry. While some worried about the impact it would have on pension providers, Flynn feels many firms were better prepared than many had expected. It has also led to the creation of new and specialist service providers. “Interestingly, annuities are one of the few products where a commission can still be taken on a non-advice sale,” he says. “That’s created a separate group of specialist brokers that operate in this area and those are very slick organisations with significant technology and processes that do give the client positive outcomes. “That’s all come from RDR, where people were feeling uncomfortable paying for advice as opposed to paying for a product. Probably about 50% of annuities come through that route.” While the coming year could see further reforms to the market – possible cuts to the triple lock and pension tax relief have been suggested – it’s clear that the market has provided far greater flexibility to retirees than before, which is something that is likely to continue. And provided pensions have access to proper advice, they should be able to navigate further shifts without being left out of pocket.
Pensions evolution: A timeline
From initially only being offered to people of ‘good character’ to freedom that allows you to access your entire pot in one go, pensions have evolved greatly over the last century.
View timeline
Before the pension freedoms reforms, drawdown was only really an option for wealthier pensioners, Canada Life’s Nick Flynn tells Professional Adviser. That changed once the new rules came in, opening it up to a wide range of retirees. While it has given pensioners the ability to choose how to use their pots, it has also led to some facing unnecessary taxes.
Pensions: From here to… where? A timeline...
96%
4%
The majority of pension pots fully withdrawn during the April 2019-March 2020 period were for amounts under £30,000 (Source: FCA)
Nick Flynn, director, retirement solutions at Canada Life
“Interestingly, annuities are one of the few products where a commission can still be taken on a non-advice sale,” he says. “That’s created a separate group of specialist brokers that operate in this area and those are very slick organisations with significant technology and processes that do give the client positive outcomes. “That’s all come from RDR, where people were feeling uncomfortable paying for advice as opposed to paying for a product. Probably about 50% of annuities come through that route.” While the coming year could see further reforms to the market – possible cuts to the triple lock and pension tax relief have been suggested – it’s clear that the market has provided far greater flexibility to retirees than before, which is something that is likely to continue. And provided pensions have access to proper advice, they should be able to navigate further shifts without being left out of pocket.
20th Century
1908
Old Pension Act introduced, only available to people over 70 and of “good character”
1946
A state pension for every citizen implemented on a contributory basis. Came into effect in 1948
1978
State Earnings-related Pension Scheme (SERPS) provides a pension related to earnings in addition to the state pension
Since the 1970s, the UK has seen an accelerating rise in lifespans. In 1970 a 65-year-old male had a life expectancy of 13 years. By 2007, that had risen to 17.5 years. This means the UK population is gaining around 1.2 years per decade, compared to just 0.1 years per decade from 1849 to 1970. These trends in increased life expectancy, is translating to longer periods of retirement. Already the state pension age has increased from 65 to 66 years in 2020. It is likely to reach 67 by 2028. This is despite the fact for the average 65-year-old, half of their remaining years will be in ill health - see below.
UK
63.1
16.2
Years old
0 10 20 30 40 50 60 70 80 90 100
1980s
1980
Social Security Act introduced to remove link between average earnings and the State Pension. People with private pension also allowed to opt out of SERPS and pay lower contributions
1986
Amendment to Social Security Act and the Financial Services Act launched, helping introduce the personal pension schemes
1990s
1991
Robert Maxwell pension scandal. After his death, the newspaper magnate and owner of the Mirror Group is shown to have looted £460m from the company’s pension fund
1995
The Pension Act equalises future pension age of men and women to 65
1999
Stakeholder pensions introduced as part of the Welfare Reform and Pensions Act. Coming into effect in 2001, the pensions were designed to encourage more long-term saving for retirement among low-to-moderate earners
Decades of social change have left individuals with fewer strict and ordained roles and routines. The flexibility over when, where and how we do certain things has changed dramatically. Young adults finish education much later; marriage, children and the purchase of property is occurring at a later age (if at all). “At a fundamental level, the traditional demographic markers through life have become less fixed – changing the structure of our lives and the meaning of age. This means people are taking much more action that is reflective of their individual circumstances, rather than because they feel they have to because they have reached a particular age/stage in their life.” Andrew Tully, Canada Life This changing meaning of age is worrying as younger generations seem to give less thought to how they will retire. Recent research by ING shows that people in the UK are anxious about how they will afford retirement, with 32% of respondents stating they have no household savings. A similar survey by Aviva found that millions over the age of 45 were ‘baffled’ by pensions and two thirds of them do not know they need to save for a comfortable retirement, or how much they have already saved up. Such complacency could turn out to be dangerous in a few decades’ time, as individuals find they have fewer savings to retire on or a shortfall in old age.
Time spent by lifestage
1960 1970 1980 1990 2000 2010 2020 2030
90 80 70 60 50 40 30 20 10 0
Age
2000s
2001
Stakeholder Pensions come into effect
2002
The State Second Pension Scheme (S2P) replaces SERPS, helping lower earners top up their state pension
2004
Pensions Act introduces the Pension Regulator to help protect members of workplace pension schemes. Pension Protection Fund also introduced
Pension tax simplification policy unveiled to help pensioners better understand the many different rules around retirement
2006
2010s
Pensions Triple Lock introduced by new Coalition Government, guaranteeing the State Pension rises by either the rate of inflation, average earning growth, or 2.5% - whichever is higher
2010
2012
Auto-enrolment comes into effect, forcing every employer to put employees into a pension scheme and pay a minimum contribution of 2% (at least 1% must be paid by the employer)
Pensions freedoms come into effect, allowing people aged 55 to access their entire pension pot and withdraw it in one lump sum. People also able to access 25% of pot tax free
2015
2016
The new State Pension introduced, providing a flat rate, single tier scheme
2018
State Pension age for women increased to 65
2019
Auto-enrolment contributions increased to 8%, with 5% taken directly from salary and 3% from employer
2020
State pension age for both men and women increased to 66
As we achieve traditional life milestones later, and live longer, the ways in which we earn and acquire wealth (and lose it) is changing. The duration and quality of our later lives is also changing, as are our spending desires and priorities. Overall, more wealth is being taken into retirement than ever before. The income level of those aged 70-75 is just 10% lower than the average UK income. As a result, spending has boomed among over 65s, whilst those under 50 have cut back. Decreasing defined benefit pensions and the rise of generation rent may see this decrease starkly in the future.
Key trend driving retirement change: Living longer
Key trend driving retirement change: The meaning of age
Key trend driving retirement change: Money
With longevity comes the need for our pensions to maintain their course and live up to expectations. For a 65 year old retiring today, they could live for 20 more years, meaning their pot needs to be able to stand up to market volatility, drawdown and extra challenges like medical or care fees. Meanwhile, those in their 30s and 40s today could be working for even longer if the UK follows in Japan’s footsteps, where a national pension age of 75 has been proposed. The ‘Centre for Social Justice’ (CSJ) founded by Iain Duncan Smith, suggested the same for the UK earlier this year. Regardless of when individuals retire, advisers will need to ensure clients have enough capital saved up during their younger years that has been invested carefully for them to access in retirement. Sequencing risk – and the danger of mis-timing withdrawals is also a concern that could, if not assessed properly, see pension pots dwindle quickly.
The average life expectancy of individuals in the UK from 2016-2018, shows on average 16.2 years was spent in ill health (Source: ONS, Trajectory Research)
healthy years
unhealthy years
mature & free
old age
young adults
parents
childhood
teenager
Trajectory Research suggests young adulthood is being extended as education finishes much later on life. In addition, moving out of the family home and other milestones are delayed into later life
79.3
So are younger generations, millennials and generation Z destined to live longer but retire poorer? Well, according to Bank of America’s ‘Better Money Habits’ report – yes. And this is in spite of the fact that the respondents in their survey started saving for retirement earlier than their parents. On average, the study notes, millennials started saving for retirement at age 24, whereas Gen X began at age 30 and baby boomers began at age 33. Almost a quarter of millennials have $100,000 or more saved, while 59% have $15,000 or more saved. Yet still, they have less wealth than their parents did at the same age.
The new retirement journeys ahead
For a long time, the road to retirement followed a familiar path. Individuals saved up for a pension during their working life in order to retire at a set age; usually around 65. These savings were used to buy an annuity in return for a guaranteed income that laid out exactly how much they would have to live on in their retired years. This path has shifted, however. The last 15 years have seen the way people save for, prepare for, and enjoy retirement change. In many cases these have been subtle, driven by what can, on an individual and year-by-year basis, seem quite slow moving demographical, economic and social trends. Over a long period of time however, there has been a quiet revolution taking place.
The last 15 years have seen shifts in how people save for, prepare for, and enjoy retirement. In many cases these shifts have been subtle, driven by what can, on an individual and year-by-year basis, seem quite slow moving demographical, economic and social trends. Over a long period of time however, there has been a quiet revolution taking place across the sector.
The changing meaning of age has allowed individuals a level of freedom in retirement that was not possible before. Andrew Tully, technical director, Canada Life
“Lifestyles are changing, families have become more complex, and people are living longer too," says Tully. "Changing social, cultural and economic trends mean wealth is peaking at a later age and this is changing, quite dramatically, how we choose to spend our years in retirement.” The declining relevance of social rules in particular means the business of retirement and saving for a pension are constantly changing. Gone are the days when retirement meant pottering around the garden, replaced with a desire to travel for example. Many people are continuing to work until they are much older, their family lives and finances may be impacted by divorce or remarriage, having children later on in life or failing to get on the housing ladder. This ‘deregulation’ of life rules, as Tully calls it, is resulting in a generational shift for retirement that will reshape the market for advisers.
In investigating the factors affecting people retiring in the coming decades, several ‘common’ journeys are appearing, analysis from Canada Life shows. It is essential that advisers are aware of these journeys in order to stay relevant to a changing client base.
The group’s ‘Remodelling Retirement’ research, produced in association with Trajectory Research, finds there are two retirement journeys that will grow significantly over the next 15 years – ‘Late financial bloomers’ and ‘Complex families, complex finances’. Currently both of these journeys are likely to be a small client base for advisers. This is because the majority of advisers today cater to retirees that are ‘financially mature and stress free’, another journey identified by the research. However, this group is expected to decrease as a proposition of the total market over the next decade and a half. Sean Christian, MD and executive director, Wealth at Canada Life UK, explains: "With individuals aged over 60 set to grow exponentially in the next 15 years there is an obvious opportunity for advisers. However, these new retirement journeys show us that the opportunity is fragmenting and focused in new areas. "Societal changes have, and will continue to have an impact on the way we live in retirement, changing both the lifestyles and advice needs of clients. Unless the industry shifts its focus to support the clients that need them, we will collectively miss out on the opportunity to enable these people to have better financial futures. Jones agrees, adding: “The adviser market is an ageing market, so numbers have been reducing, compounded by regulation making it financially difficult for some firms to remain financially viable. “The public is also becoming more financially aware, with the sharing of information online allowing people to learn much more quickly. This technology will be key as younger generations will want more online ability and will probably rely less on face-to-face transactions."
Whilst these are incremental changes; not a dramatic shift what is apparent across all client journeys we researched is that flexibility will be key in order to meet their needs, especially as wants, needs and attitudes to risks continue to change. Andrew Tully, technical director, Canada Life
Remodelled journeys to retirement
Financially Mature and Stress Free
Who are the Financially Mature and Stress Free?
Having built up comfortable levels of wealth over their lifetimes, the ‘Financially Mature and Stress Free’ group is likely to be well known to advisers. They are likely to have accumulated savings boosted by defined benefit pensions and property ownership too.
Growth in 2035
32% in 2018
The Complex Families, Complex Finances group will be more prevalent in the future as patterns of divorce and remarriage established 20 to 30 years ago reach older age and complexity continues in older age.
Who are the Complex Families, Complex Finances?
The ‘Complex Families, Complex Finances’ group strongly highlights the changing social norms in the UK today and the fact that many families do not operate in three distinct generations anymore. More often, divorce, remarriage, stepchildren, ageing parents are a core part of the financial needs of this group, with individuals going through difficult periods in their life that impact their finances. Paul Flatters, Co-Founder & CEO at Trajectory notes this group will have been exposed to the economic consequence of some of the broader social liberalisations of the 1970s-1990s, and this will have influenced their approach to big life decisions such as marriage or children (in 2017, 48% of children were born to unmarried parents, compared to 5% in 1960).
Who are the Late Financial Bloomers?
Although still at least ten years or more from retirement, ‘Late Financial Bloomers’ are likely to be a big (if not the biggest) client base for advisers in 15 years’ time. For Late Financial Bloomers, the fact retirement will come later echoes other sentiment in their lives: this is a group who are marrying later, having children later and also buying property later – if at all. This will stunt their duration of pure leisure time as they work longer and potentially house adult children at home for longer too.
16-24 25-34 35-44 45-54 55-64 65-74 75+ 16-24 25-34 35-44 45-54 55-64 65-74 75+
Mortgages used to overtake renting by 34, now it's by 44
100% 80% 60% 40% 20% 0%
Buying with mortgage
Renting (social or private)
Who are the Later Workers, Community Centric and Long-term Supported?
This final two groups represent a modest but consistent minority of individuals that are unlikely to have access to financial advice at any point during their life – despite the fact they could benefit from it the most. In the first category, ‘Later Workers, Community Centric’’, individuals are managing to stay healthy and active despite not having wealth that traditionally supports that lifestyle. Individuals in this category may be self-employed, meaning their pension provision is not as strong as an employer-based one. Their retirement is likely to be reliant on earned income during their lifetime, and it will have experienced weaker income growth than the national average.
60-69 70-79 80+ 60-69 70-79 80+
24%
32%
30%
19%
10%
39%
29%
16%
The Complex Families, Complex Finances group account for a third of those aged over 60, rising to 4 in 10 of those aged 60-69. This is up from a quarter compared to a decade ago.
01
Age 45
Likely to have incomes around 30% higher than average, paying down their mortage with no or one child.
Age 65
By now have accmulated wealth from investing high disposable incomes and significant inheritances. They no longer need to work but may still be doing part-time freelance or consultancy work or thinking about how to step back from their own business. Their free time is spent actively enjoying themselves.
Age 85
Still enoying leisure activities but at a more relaxed pace such as eating out or visiting family though some may well still be travelling or even working.
Complex Families, Complex Finances
02
03
Late Financial Bloomers
04
Later Workers, Community Centric / Long-term Supported
Who are they?
Average age: Over 65 Marital status: Married once or single Housing tenure: Own home Pension status: DB/DC plus savings
Average age: Over 45
Average age: 35+ Marital status: Married once, co-habiting or single Housing tenure: Rent or mortgaged home
Average age: 65+ Marital status: Any Housing tenure: Mostly rent or still mortgaged
21%
The Financially Mature and Stress Free make up 21% of retirees today and make up a large proportion of advisers’ client base. However, this will decrease over the next 15 years.
The Complex Families, Complex Finances group make up 32% of the retirement market today. This figure will grow in the next 15 years.
6%
Late Financial Bloomers make up 6% of the market today and will experience strong growth
18%
Later Workers, Community Centric make up 18% of today's market and is likely to stay consistent
23%
Long-term Supported make up 23% of the market in 2020 and is likely to stay consistent
The lives of this group are also much more complicated as a result of them becoming a ‘squeezed middle’ generation that has care responsibilities downwards in the form of children, as well as upwards for ageing parents too.
They are also more likely to have been more exposed to the after-effects of the global financial crash, meaning home ownership may not be a part of their wealth outlook in retirement. At worst, more people in this group will be part of ‘generation rent’ and a greater proportion of their income will be spent on housing. At best, people will eventually buy a property, but the time between finishing their mortgage and retirement is likely to be smaller. This will leave less time to accumulate other assets, savings and investments. “They may have to play catch-up as far as building wealth is concerned and they will have a much more compressed investment horizon,” says Canada Life’s Andrew Tully. “In a way that is ok because they are going to be working later in terms of retirement ages. But they will need a different investment strategy compared to many other clients with very different financial needs.”
Unfortunately, as the incomes of the poorest have failed to increase at the same rate as average, the ‘Long-term Supported’ category is unlikely to shrink in the future and will be a consistent subset of those retiring in any one year. This group is being left behind from the retirement revolution, suffering from poor finances as well as poor health.
Incomes in both of these categories are likely to be less than £25,000 annually for full time employees. In the Long-term Supported category, there is likely to be a significant benefit element to their incomes as well. “The The Later Workers, Community Centric / Long-term Supported are a stable subset of the retirement population in terms of their size as a proportion of the older population. This is not going to change.” Yet Canada Life’s Andrew Tully adds there is an opportunity for them to still be able to access good pension provisions and advice. “There are two ways they can try to ensure they are setting themselves up properly for retirement and receiving good advice. One is through an employer, and the ability to facilitate and even partly pay for financial advice. The second would be as people approach retirement is via robo-advice through an adviser firm or similar.”
Although this group makes up 21% of the market, it is expected to decrease as a proportion of the total market. However, the number of individuals who are Financially Mature and Stress Free is shrinking compared to a decade ago. Changing lifestyles of younger generations, differing financial hardships and dependents mean this group will be a less prevalent part of advisors’ client base. Paul Flatters, Co-Founder & CEO at Trajectory, notes this is a generation that has been extremely lucky throughout their lives. “This is a group of people that financial advisers will be most familiar with and have dealt with most commonly. This means it is a group that advisers probably understand the best.” As a generation they have benefited from being healthier than their predecessors, experienced generous retirement provisions form their employers, and not just financially richer in retirement but are likely to have been at the forefront of a number of economic and social progresses that has made their later life more enjoyable.
Adviser viewpoint
Adviser viewpoint on the Financially Mature and Stress Free This generation of retirees has been largely fortunate, with long careers and a step-up on to the property ladder early providing them with a stable income in retirement. Typical conversations with their financial advisers are focused on disposable income they may have access to, and inheritance provisions for their family. Andrew Pennie, Marketing Director and Head of Pathways, Intelligent Pensions, says many retirees in this group have benefited from final salary pensions, inheritances, periods of tremendous stock market and property value growth, as well as improvements in longevity meaning they can enjoy their wealth.
Adviser viewpoint on Complex Families, Complex Finances Strabens Hall’s Nick Toubkin notes the Complex Families, Complex Finances clients is already a growing client base for the group. The impact of family complexities on their pension pot and broader finances can be significant.
Adviser viewpoint on Late Financial Bloomers According to Rob Hillcock, senior financial planning consultant at Broadstone, Late Financial Bloomers will represent be a new type of client base for many firms, and advisers will need to adapt to ensure they can meet their demands.
Adviser viewpoint on Healthy Not Wealthy/ Unhealthy Not Wealthy Whilst a small, or non-existent client base for many financial advisers, this group is likely to be concerned about being able to fund their retirement. Many will be looking to take on active employment to supplement their income and maintain their lifestyle in retirement. Intelligent Pensions’ Andrew Pennie explains: “The ‘not wealthy’ groups are most likely reliant on the state pension which is currently protected by the triple lock.
Back to journeys
2008-09 16-24 25-34 35-44 45-54 55-64 65-74 75+ 2018-19 16-24 25-34 35-44 45-54 55-64 65-74 75+
|
The Financially Mature and Stress Free
Later Workers, Community Centric / Long-term Supported’
For this group, the key is managing and maintaining the ongoing standard of living against the key risks of longevity, inflation and investment risk. Additional discussions will clearly include tax-efficiency, long-term care and inheritance planning. Andrew Pennie, Intelligent Pensions
Another change for clients over 60 and approaching retirement in this group is that they do not consider themselves old, says Kay Ingram is Director of Public Policy Director, LEBC Group. “They want to lead an active life and may want to continue working either in paid employment or voluntarily – not because they have to, but because they have skills and experience to contribute. Retiring gradually is often a better way of managing the transition from work to retirement.” However, regardless of how financially mature current retirees are, nobody is completely stress free: “Even those clients not worried about retiring are not always stress free. Currently there are concerns around their children, who might be losing their job or businesses that are struggling as a result of Covid-19. “We are having lots of conversations with these clients about how to help their children through gifted loans or working with them to find the best options that don’t negatively impact them or their children through taxes.”
The life of the Financially Mature and Stress Free from aged 45-85
“Advisers are likely to encounter vulnerable clients in this age group experiencing stresses that their parents never had,” says Canada Life’s Andrew Tully. “Whilst they may have decent savings, as couples split or remarry that money may need to be put to other uses. As a result, these individuals are having to rebuild their pension provision. They are also more likely to be carrying debt into retirement and may need to use tax-free cash from a pension to pay off it off.”
The needs of this group must be much more considered with solutions such as equity release and proper insurance or protection in place for families as a priority. In particular, advisers must be able to show the value of good advice at a reasonable cost in order to assist with the needs of this group.
With this group it is important to evaluate how they can manage their finances to ensure equality amongst the different parts of the family. Nick Toubkin, Straben’s Hall
Intelligent Pensions' Andrew Pennie notes the challenges for this subset of client is varied however, from divorce, looking after elderly parents, supporting children at home or moving up onto the property ladder all common issues that can negatively affect finances. “This group tends to have multiple objectives and often these objectives are conflicting and need careful management to help clients make informed choices. “Particular events can create immediate needs which trigger a financial transaction, for example accessing money from a pension or taking equity release to provide a deposit for a child’s home,” explains Pennie. “They suggest a divorce will mean you need to work at least five years longer than you would have done but with the over 60’s becoming the highest growing group for divorces, many will not be able to work longer to make up the divorce shortfall.” Pennie believes people in this group value flexibility and drawdown strategies tend to be particularly attractive, provided they are willing and able to take the associated risks involved. The importance of having a financial planner that is used to dealing with these challenges is key and LEBC Group’s Kay Ingram says the group has to provide advice that takes all the circumstances of the individual and family into account. Often this includes the complexity of inter-generational demands, health complications and stepfamilies, conflicts in business relationships, redundancy and bereavement. “Financial planners are used to dealing with these many facets, helping clients to prioritise goals and acting as a family mediator,” she says.
This is a younger client base whose outlook on life, and how they manage their finances, is based on a new way of thinking. Everything from fees, to the types of investments they make – this is a generation very focused on sustainable investing for example – will be different. Rob Hillcock, Broadstone
In many respects, financial advice is not a key concern for them, given the fact they are several years if not decades away from retirement. Yet the danger within this group of clients is the fact they will ignore planning for their retirement until their later years, says Hillock. To this end Broadstone believed education is crucial, and the group runs regular educational seminars across employer workspaces to educate younger workforces about the importance of auto-enrolment, financial advice, and the use of cash flow models to plan for their retirement. LEBC Group’s Ingram agrees: “There can be a focus on achieving key milestones in a very sequential way: education, followed by married, followed by children, and retirement can seem to be the very last thing on the list too. “But it is vitally important this group understands how contributions to your pensions in your 20s and 30s is crucial to ensuring they have enough to retire with. If they leave it until they have almost stopped working, have substantial debts and their year of retirement coincides with a pandemic like 2020, there will not be sufficient funds for them to retire with.” Ingram notes auto-enrolment should ensure all employees are contributing to their pension from a young age. But understanding what level of spending and lifestyle retirees can afford on a sustainable basis is also key. To this end, education and cash flow planning to help them put their own finances into a proper context is key.
Research suggests the state pension is barely enough to prevent pensioner poverty and any fall in the value of those benefits will be a significant risk for this group. Andrew Pennie, Intelligent Pensions
However, recent workplace changes such as auto-enrolment have been a big initiative to prevent this group from growing. Pennie believes it will still take time to become effective and without compulsion and higher levels of contributions, there are still going to be too many poor retirees who are unable to achieve the standard of living they desire. The answer to this challenge could be in the form of technology, and workplace pension and benefits advice. “Technology enabled advice is crucial [for this group] because it allows them to manage a lot of their finances themselves. It also means if they reach life events later advice whereby they need more in-depth advice, it is much easier to plan,” he says. LEBC Group for example, offers ‘bionic’ advice and tools such as the Hummingbird app, a budgeting and savings app that brings together savings, debt and expenses in one place, allowing clients to set realistic budgets and targets. Overall, the group’s bionic advice services allow you to access mortgages, will writing services and protection services and more. “These are services are available to everyone online,” explains LEBC’s Kay Ingram.
Healthy Not Wealthy / Unhealthy Not Wealthy
2008-09
2018-19
Some of this group won’t make this age and if they do are indecline or need of care, having to sell their house to fund it (approx. 85% own their own homes versus approx. 75% average at this age).
Inheritances may be going sideways to the spouse of remarried parents or are diluted by half siblings and step siblings. Some of this group may still be working, potentially more hours than they’d like. Others may still be caring for multiple grandchildren as well as elderly parents. Some in this age group are still divorcing and re-marrying
Starting to divorce by now or the next few years and many may well now be spending money on renting and other associated costs of single living, as well as child maintenance responsibilities. Others may soon remarry and support step-children as well as their own.
The life of Complex Families, Complex Finances from aged 45-85
60+
2010 2018
Those who managed to buy their own home may be comfortable, still managing to avoid deterioration in health but probably not for much longer. If not already downsized they may need access to equity release.
Most will still be working for at least a few years yet, and may even have a couple of years left on their mortgage if they were able to get one. Some will be welcoming children back from university and maybe starting to think about living inheritances to help them on the housing ladder earlier than they managed themselves. A large part of this group who remain in rented accommodation this might not have that option. Big travel or lifestyle ambitions may need to be funded by downsizing.
Many still be single or just married. Spending high proportions of salary on rent or just recovering from a wedding or purchase of a first home. Some have children just starting school and only just stopped paying the expense of childcare or only just re-entering the workplace after protracted parental leave.
The life of Late Financial Bloomers from aged 45-85
Having lived healthy lifestyles all their lives many of this group are still independent or only slightly dependent on external support, and will be keen to stay this way. Having given up work later than most their limited assets may have matured enough to not have to stress too much about money and enjoy the occasional treat with family but are likely to still be very budget sensitive. Health and well being measures are still twice as high as other groups.
While it may not pay well this group are likely to be actively choosing to work as a source of mental and physical wellbeing, having found jobs that are suitable for older people to do or age friendly employers. A large number of this group might also be volunteering for a charity or in their community, or by now supporting their children with childcare if they have time. Health and well being measures at this age are twice as high as other groups.
Incomes 50-60% lower than average, limiting an ability to start accumulating wealth. High proportion renting or mortgaging very modest homes if on a double income. Economically motivated behaviours may keep them physically active such as walking or cycling to work, and their daily routines or interests are keeping them healthy. Will need to be good enough cooks to eat healthily on a budget. Probably unable to give their children much financial support in later life but could be active parents, volunteering to coach the football team and such like.
The life of Later Workers, Community Centric from aged 45-85
Some may not make this age and if they do will be living with at least one morbidity. Highly likely to be using on some kind of care or assistance.
Health and well being measures at this age 30% lower than the national average. Likely to be reliant on state pension as main or only source of income. Health already starting to deteriorate.
Low incomes are less than half the national average. Very little savings. Most renting or social housing. Higher index of unhealthy behaviours such as smoking or obesity.
The life of Long-term Supported from aged 45-85
View Long-term Supported
View Later Workers, Community Centric
Close Adviser viewpoint
Pension status: Accumulation of retirement wealth compressed by late access to home ownership, marrying and having children later in life
Marital status: Divorced, separating or cohabiting
Housing tenure: Own home or rent
Pension status: Historic Defined benefits with an active workplace pension
Partly/or very reliant on state pensions and other state benefits. Later Workers, Community Centric also have modest pensions through employers
From new attitudes to life, to how they approach investing, the wealth outlook is different for baby boomers, millennials and generation Z. Professional Adviser investigates how this may impact their retirement.
It is natural that with each generation, the meaning of retirement and how they live their later years changes. Older generations may have benefitted from above inflation increases from the triple lock, whilst younger generations will not have. These, and other advantages mean a large number of this generation should have a more comfortable retirement than previous generations. There is no question that future generations are dealing with lower investment returns and more provision in defined contribution pension arrangements meaning their retirement will not be as comfortable as their parents. A core challenge for advisers today is ensuring the gap between client’s expectations of the income that can be generated from a given pension fund matches the reality. This is not an easy feat in a somewhat permanent low interest, low inflation, low growth world.
Older generations (baby boomers) have seen property prices and investments increase significantly due to favorable markets and could have some form of retirement provision linked to a defined benefit scheme. Neil Jones, tax and estate planning specialist, Canada Life
Notably there is a case to be made for ensuring assets are well-managed before pension assets, and that advisers engage with consumers early enough to influence the trajectory they are on, says Sean Christian, MD and executive director, wealth at Canada Life. Products need to be increasingly flexible to support different generation’s lifestyles, as well as the fact younger generations will live longer.
As lives get longer, advisers will need to work hard to ensure clients don't run out of income in retirement. Mitigating this risk will be a key task for advisers in the future. Sean Christian, MD and executive director, wealth, Canada Life
Despite retirement planning becoming an increasingly important part of the advice lifecycle, most advisers are yet to develop a centralised retirement approach in the same way as a Centralised Investment Proposition (CIP). Yet having a clear strategy for different client segments means advisers can help both their clients and the firm mitigate risks that emerge as clients’ age. This is all the more important now that we can see the different approach needed to help individuals require across the generations. They require more than just a ‘one size fits all’ annuity, says Andrew Tully, technical director, Canada Life.
A Centralised Retirement Plan can not only help you deliver robust investment and withdrawal strategies for resilient and sustainable income, but will also ensure clients use their available tax allowances as they phase into retirement – a key concern for younger individuals planning for retirement today says Canada Life’s Neil Jones. Perhaps most importantly, a CRP can simply manage expectations on how much income your client can expect, and help them understand their capacity for loss.
Retirement post Covid-19: We need to go back to basics
On the list of things that could derail the pensions market in 2020, a global pandemic was low down. Yet as lockdowns continue to impact employees, businesses and the economy, hundreds of thousands of people are also facing the prospect of revising their retirement plans.
Some are having to work longer than anticipated whilst others access their pension savings early to bridge income gaps. Analysis by the Institute for Fiscal Studies (IFS) found 13% of older workers changed their retirement plans as a result of the pandemic. Around 8% of individuals are planning to retire later, with a smaller percentage retiring earlier. Whilst concerns about inflation, recessionary markets and future tax increases abound, one thing customers are learning as a result of the coronavirus pandemic is the value of good advice, a focus on fees and the need for investment simplicity to reach end goals.
Bank economists and fund management strategists will try to give you a clear view on what is happening and what is going to happen in the future. The reality is, we don’t really know what is going to happen at the moment. Therefore, from my perspective, we need to get back to basics. David Marchant, chief investment officer, Canada Life, and managing director of Canada Life Asset Management
To this end, Marchant notes it is essential clients are advised appropriately, particularly when it comes to where they invest. “It is easy to forget with so many investment managers putting their own messages out, but we must ensure investments are kept simple, are transparent and straightforward. People will always come up with clever new fund ideas or focus on a hot new sector. The more complex the approach, the higher the charge for such products. I think that is the wrong approach.” A focus on simplicity is perhaps needed after a year of freefall in markets, rebounds and confusion. In March, the UK stock market fell by more than 30%, yet in China, where the coronavirus originated, stock markets were outperforming. The summer of rebound resulted in a boom for tech stocks and today the combined value of Apple, Amazon, Google and Microsoft is worth more than the whole of the Japanese stock market combined. Meanwhile, negative interest rates across Germany, France, Switzerland, Spain and the Netherlands has turned the concept of saving and lending on its head. For those planning for retirement, a refocused effort is needed in order to reach their goals.
Rob Hillock, senior financial planning consultant at Broadstone, agrees: “The current crisis means people are having to take a long hard look at their pensions in the context of retirement planning. People now know how complex pensions can be and are realising the value of good advice.” Hillock has made better use of its cash flow analysis tool which helps illustrate to clients whether there is a need to increase contributions or reduce drawings as well as stress test their portfolios with ‘what if’ scenarios. This has been invaluable in calculating the right level of drawings for those retiring early, and ensuing funds are not depleted too quickly.
Kay Ingram, public policy director at LEBC Group, believes building resilience into client portfolios is becoming a must. The group is focusing on short-term needs by securing essential spending needs on a guaranteed basis wherever possible, insuring risks such as ill health and premature death, and requiring adequate cash reserves to be maintained to enable any short-term cash flow issues to be minimised. However, Ingram notes that from an investment point of view they do not expect to return to the double digit growth we have seen in the last 10-12 years any time soon: “We expect growth to be sluggish, certainly in the short term, so it’ll be a test to try and balance investment risk with the risk of clients not hitting their objectives.”
In a world of lower returns than ever before, a focus on fees is essential for advisers to ensure they do not chip away at customer returns. The rise of passive investing has already seen total solutions cost come down over the past decade, yet more complex funds designed to combat volatility and eek out returns in more difficult times have created a wave of higher fee funds.
There are no new investment solutions: we have equities and we have debt. Then combinations of the two. We can introduce derivatives or alternative asset classes for which you end up paying more fees, despite the fact returns may be lower as a result. Yet all investors really need to think about is ensuring their portfolios are properly diversified across a range of asset classes, risk is spread both in terms of timeframes and in terms of the variability of assets, and that potential downsides have been factored into any investment strategy. David Marchant, chief investment officer, Canada Life and managing director of Canada Life Asset Management
Risk-orientated funds have risen in prominence for this very reason over the years: they are globally diversified, and designed to meet the risk appetites of clients, these funds can deliver higher returns over the medium-to-long term in higher risk funds and lower returns in less risky funds.
What to expect: Tax rises
The Conservative Party made an election promise to not increase taxes in 2019. There was also a promise to end the ‘arbitrary tax advantages’ for the rich. These promises were made, however, before a global pandemic saw government borrowing increase by more than £100 billion in two months, and debt levels rise above 100% of GDP for the first time since 1963. Ahead of the now cancelled 2020 budget, Chancellor Rishi Sunak was accused of being on track to deliver the “biggest tax grab in a generation”.
Given the ongoing unknown path of the pandemic and the all-important arrival of a vaccine, opinion is divided on exactly what tax changes could occur in the next Budget. After all, with businesses still struggling amidst local lockdowns, tax rises are going to be difficult in a recovering economy. Yet the global pandemic has provided the government with a chance to change tack, and advisers an opportunity to understand potential issues clients are likely to face in the future “Covid-19 has presented an opportunity for wider reform,” says Canada Life’s Neil Jones. “Whatever the Chancellor of the Exchequer does, we will see changes. Mr Sunak has been bold in his policies so far so I think he will take this opportunity to do more. For example, capital gains tax is, in my opinion, ripe for reform. Mr Sunak has already asked the Office of Tax Simplification to review capital gains tax, alongside a consultation on private residence relief. Once the right structure is in place, we could see an equalisation with the rates of income tax, and potentially a lower annual exemption for CGT.” Jones explains: “CGT was designed after all to tax the income and returns that fall outside the tax regime, so why tax it at different rates, and why should it have its own tax-free exemption?”
A likely option is to tax wealthier residents through caps on private residence relief. Currently you do not pay CGT when you sell your home if it is your main home for all the time you have owned it and not rented it out or used it as a business premise. However, significant wealth has been passed on tax-free as the relief us unlimited. Jones adds the interaction with inheritance tax also has potential as currently assets passing to spouses and civil partners are free of inheritance tax and the acquisition cost for CGT is rebased.
However, without significant reform, Jones says the amount of additional revenue such tax changes would create is debatable. Other tax advantages that could be vulnerable according to Jones include ISAs which only the wealthiest can maximise. A cap on total contributions in some form could be on the horizon for instance. Taxes on pensions paid to retired workers could also be raised. In September, Paul Johnson, head of the IFS, told the Treasury Select Committee, which was investigating tax options to repair the public finances, that pension tax relief restrictions and pension tax relief has raised lots of money over the past decade, bit there has been no increase in the tax on pensions in payment. Philip Booth, from the Institute of Economic Affairs, told the committee he would “severely limit” the tax-free lump sum that it is possible to receive form pensions if only to simplify the pensions tax process and avoid the government’s idea of allowing tax relief at only the basic rate.
One option is to tax wealthier residents through caps on private residence relief
Changing perceptions How will attitudes towards pensions change over the coming decade?
Kay Ingram, public policy director at LEBC Group
Changing perceptions
It’s fair to say that people’s views of pensions over the last decade have profoundly changed. With the decline of defined benefit pension propositions and the rise of auto-enrolment, many more citizens now have the option to create retirement pots to use in their twilight years.
Until auto-enrolment became the norm, it was common for many workers to think that contributing into a pension was an unnecessary use of their hard-earned salaries. According to Nick Flynn, director, retirement solutions at Canada Life, many who have now accumulated some form of pension pot have little clue as to how much they have.
How will attitudes towards pensions change over the coming decade?
I am constantly speaking to people about pensions and I’m amazed that many don’t know what they’ve got in their pot. When you explain how it works to them, it is clear they haven’t given it much thought. Nick Flynn, director, retirement solutions, Canada Life
Flynn’s comments are supported by research from the Institute for Fiscal Studies (IFS) which looked at how retirement expectations and attitudes have changed during a decade of pension reforms. Only around half of individuals report that they understand enough about pensions to make decisions about saving for retirement. This low level of self-reported understanding has been persistent over the last decade, despite major pension reforms and consequent discussion of pensions in the media.
The digital revolution
However education in this area is slowly improving thanks to new technology. All pension providers now have some form of app or online presence and so people are able to access their accounts far easier than before. Flynn feels this could lead to far greater interest in how pensions are performing among younger people. “I think people will significantly develop educationally as technology improves. To say that now people have access to their pension funds on their phone, you would have laughed at the idea five or ten years ago.”
62%
of workers from younger generations would welcome new portals offering a single view of their wealth management
Indeed research from PwC into pensions technology reports that 62% of workers from younger generations would welcome new portals offering a single view of their wealth management. This is perhaps the reason why 61% of pension scheme said they expect to invest in tools that give members greater online access to their pensions. Flynn agrees this is the way forward, and predicts that pensions could become central to how people think about their wealth, thanks to auto-enrolled pots now starting to amount to significant sums. “Workplace pensions haven’t been around a huge amount of time, but if you’ve been in the same job since they did, you’re starting to see some quite significant values,” he says. “It’s all very well having £900 in a pension, but now that it’s turned into £15,000 people are showing a bit more interest in it".
Many individuals are far more interested in their mortgage or car payments. Maybe that is because they are in their 40s rather than their 50s, but there is a huge lack of knowledge and understanding of the multitude of things you can do with your pension. Nick Flynn, director, retirement solutions, Canada Life
Maybe pensions will become like property: hotly contested and talked about. How often do people go on Rightmove to look at the house that has gone up for sale across the road? Will pensions be the same in the future? They will when they start becoming worth a lot more. Nick Flynn, director, retirement solutions, Canada Life
The next step
It’s all very well knowing how much you have saved away, but making sure it’s being put to good use is the next crucial step, regardless of how old you are. “You could argue that if you’ve got 20 years to go before retirement, why is it that important? There’ll probably be a multitude of changes in taxation and products by that point,” says Flynn. People should certainly be thinking about what to do with their pots by their late-40s, he adds.
The recent change from 55 to 57 years old for controlling your pension has pretty much gone under the radar, which is surprising. Nick Flynn, director, retirement solutions, Canada Life
And there are reasons others should too: According to the IFS, research into the effect of the rise in the state pension age from 60 to 62 has found it leads to an increase in people in their 60s being in paid work. The rise in pension age does not only affect the likelihood of people working longer and retiring later. With the current new state pension worth £175 per week and many individuals having to wait longer to claim a new state pension, it significantly reduces the incomes of most people affected by the reform.
“They’re far more interested in their mortgage, car payments, and things like that. Maybe that’s because they’re in their 40s rather than their 50s, but there is a huge lack of knowledge and understanding of the multitude of things you can do with your pension.”
