We’ve all had a while now to digest the reforms to UK pensions which will be in force from 6 April. If you are anything like me, you will have attended more than a few sessions. The purpose of this article is not to cover these areas again, but to give a few ideas to be thinking about.
When people ask me to give my opinion of the changes my answer is ‘everything and nothing’. For people at either end of the pension saving spectrum their flexibility is pretty much as it was. Small pots could be commuted and large pots could (with planning) be drawn from flexibly – no real change with Flexi-Access Drawdown. The big change is for the massive middle. People who knew their pension wasn’t going to be enough and had become disillusioned now have the option to have a ‘shaped’ retirement. By this I mean they can have the ‘live your dreams’ holiday (or the now infamous Lamborghini) before settling into a more mundane retirement. That sounds fulfilling doesn’t it? Our job as a profession is to equip clients to make good, informed – eyes wide open – decisions.
So, what does this look like and what should we be doing? I like to think of Paraplanning as looking through the telescope (long term objectives based planning) and microscope (technical detail) simultaneously – whilst being immersed in the now! Here are three things that I think we need to be particularly hot on (not just for retirement planning).
Firstly – dig for the real heartbeat objectives! Now even more than ever we need to know and understand what makes each client tick. What does the ‘fulfilled life’ look like for them, what are their ‘if only…’ aspirations? We need to get beyond a vanilla financial prudence and income needs to know what really gets them going. This rightly sits with the adviser, but we need to encourage this and make sure that it is documented. This means that we can write reports and build financial plans that build on these aspirations. Using our skills we can help clients achieve their dreams, or learn how to adjust their expectations. Not only does this make writing the report more fun, it is great for business and provides a defence if all goes wrong. Deeply client-centric communications are much more likely to be read than a dull ‘compliance led’ piece and therefore clients are more likely to understand the disadvantages of proceeding.
Secondly – know the limits of the words ‘guarantee’ and ‘secure’. They only have the same value as the person speaking them and the depth of their corporate pockets. Particularly understand the benefits and limitations of these particularly in relation to defined benefit schemes. If a client is leaning heavily on these they need to know how secure they are and what the impact would be if the scheme moved into the Pension Protection Fund. This exercise needs to take place more than a year before retirement as a transfer (if most suitable for that client) might not be possible afterwards. Mark Underwood has written a great piece on transfers out of Final Salary schemes (http://www.nomadparaplanner.com/musings/defined-benefit-transfer-advice-its-only-advice-not-a-confirmation-of-a-positive-outcome/) which should be essential reading.
Thirdly – understand the limitations of linear growth assumptions. Abraham Okusanya has recently put out an excellent paper on Pound Cost Ravaging (click here to download it http://www.finalytiq.co.uk/pound-cost-ravaging-whitepaper/). We all know that investments do not (with some exceptions) produce perfectly linear returns, so why do we assume this is the case for our analysis/modelling. Start to get to grips with the concept of Monte Carlo simulations using a random distribution of returns throughout the scenario. You need to understand what is going on, but some cash flow modelling programs can do it. It is also possible to build such a simulation in Excel. Either way make sure your advisers and clients understand that there are still risks and the portfolio might need to achieve unlikely returns to recover if markets took a prolonged tumble. By modelling a range of possible outcomes (we try to run at least 1,000) you can get an indication of the probability of success or failure.
As with all areas of financial planning we need to make sure that people are making decisions with their eyes wide open. People are paying good money for advice which has the potential to give or take away the fulfilled life they want. Now is the time for Paraplanners to show their worth as a profession and deliver excellence!
This article first appeared on The ParaHub in February 2015.
This content is intended for Paraplanners and does not constitute Financial Advice. If you require Financial Advice please contact a Financial Advice company such as my employer EQ Investors.