Vital signs: The case for financial check-ups in retirement

Pension reforms have given financial planners fresh opportunities to help clients at retirement and for many years afterwards too. Such planning must adapt and evolve to the client’s changing circumstances, particularly when they rely on the income to maintain their standard of living.

Therefore it seems surprising that, since April 2015 when the limits on maximum cash withdrawals from pensions were effectively scrapped, there has been no regulatory obligation for advisers to review their client’s drawdown arrangements at any time. Check-ups are a simple way to spot and deal with problems before they get out of control. And reviews are not just a chance for clients to take stock – they also allow advisers to engage with clients and demonstrate high quality personal service.

The Social Market Foundation proposed the idea of a ‘mid-retirement financial health check’ in its Golden Years? What freedom and choice will mean for UK pensioners report. It said: “Given that non-annuitants will have to make multiple financial decisions into very old age, there may be value in… prompting people at age 75 to re-consider their financial position and plan financially for the remainder of their lives.”

So what might change? There are likely to be economic, legislative and regulatory changes – consider how different the world now seems compared to 10 years ago. Clients may find changes in their wealth, income requirements, attitude to risk and capacity for loss, their family situation, and their physical and mental health. Older people are often more realistic about, and perhaps more focused on, finalising plans for later life in terms of care, wills and executors, powers of attorney, and estate planning.

Mid-retirement reviews would need to consider the suitability of drawdown arrangements in the same way as the original recommendation. Under COBS 9.3.3 firms recommending income withdrawal need to take into account factors including the client’s investment objectives and state of health, income requirements, and their attitude to risk.

Tax treatment of pension death benefits changes at 75, but that’s not the only reason it can be considered a watershed point. Health issues become more prevalent around this age. Official figures suggest the average 65 year old man remains in good health for a further 10 years, and 11 years for a woman. By age 75, one in five women and one in six men will have suffered a stroke. Conditions such as dementia become more common at greater age, suggesting a rise in the numbers who may struggle to continue running their own financial affairs.

Half of men reaching age 75 will survive a further 16 years, and 19 years for women. That raises the possibility that some are at risk of outliving their assets. Critical yield calculations used in drawdown reviews should be based on individually underwritten Guaranteed Income for Life (GIfL) rates. This is the fair benchmark for clients to consider alternatives and also demonstrates to both client and regulator a truly personalised service that takes health and lifestyle into account.

Each year a client stays in drawdown, they lose the mortality cross-subsidy on offer from a pooled-risk solution. To generate equivalent income requires additional fund growth. In early retirement the extra return needed is relatively low, but it increases with age. For a man, 1% extra growth is required at age 71 rising to 2% by age 77 and 3% by age 81. Add typical drawdown charges of 2% on top of the extra fund growth required and it is clear the financial sense of choosing GIfL increases with age.

The optimum age to switch will vary from client to client. For those relying on generating income to pay the bills, leaving it too late could be a real problem and lead to complaints.

Finally, the mid-retirement review is a good opportunity to consider what could well be the client’s biggest asset – the wealth tied up in their home. This could be for estate planning purposes, or to use the housing equity to pay off debts, sustain the current lifestyle or provide an extra cash boost.

If life is like a roller-coaster, reaching retirement is no longer the end of the ride. As a specialist in this area, Just is focused on making sure advisers have the tools and solutions to hand to smooth out the journey.