The shape of things to come

Our retirement years are changing in shape, both in the length of time we spend in retirement and what we can achieve throughout this time. Consequently, our financial planning must change to adapt to the new landscape.

Due to advances in healthcare, safer jobs, better housing, improved nutrition, lifestyle changes and a growing perception of what we need to do ourselves, to remain healthy, in terms of diet and exercise, the UK population is enjoying increased longevity. It is estimated that from now on, for every 100 people alive at age 65, some 31 men and 39 women will still be alive at 95.

The fact is that we can’t enjoy our retirement without sufficient income to do what we want to do, so a key priority is to both accumulate an investment and savings pot of sufficient size and then to create and manage an income stream that will give us the freedom we’d like in retirement.

That income stream will likely have to be managed very carefully and in different ways over the years as our needs and wants change. Early in our retirement we might want to travel more and that will require a certain level of expenditure, while we must still ensure we retain sufficient funds for our future years. Later, as we get less mobile, our financial outlay may be less and as the potential for needing Long Term Care later in life increases, plans will need to be set for this eventuality.

As the length of time we spend in retirement increases, which could be 30 years plus as the norm, this presents a major issue when planning how we use our retirement investments and savings, namely to ensure that we don’t run out of money towards the end of our lives. Indeed, as well as living a full and happy retirement, most people have a desire to pass on some of their wealth to family and other beneficiaries.

Effective financial planning is essential; having a properly managed financial plan is particularly important since the introduction of the Pension Freedoms. Now, we have far more flexibility in the way that we manage our retirement finances but with that choice also comes more complex decision-making.

It used to be that people would pay into a pension and then buy an annuity to provide a regular and ongoing income in retirement. Now, while buying an annuity can still be a valid option, individuals may need access to more of their funds at certain points in their retirement, such as in the early years when they are more active, meaning they should consider taking advantage of the flexibility open to them.

In future, given the right size of pension pot, a retirement income strategy may include a ‘guaranteed’ payment to cover or help meet regular outgoings, alongside an element that remains invested and is aimed at achieving an additional income stream or from which further payments can be drawn.

Incorporating the flexibility to pass on pensions to named beneficiaries without paying inheritance tax must also be considered. This means it can be more beneficial for people to spend the money in their investments first and save their pension money to last; which is the reverse of the mainstream advice in the past.

What is fundamental is to look ahead with a view on how individuals want to spend their retirement years and to plan so that their finances and investments help them to achieve their wishes. This has to include short- and long-term planning, looking at what money may be needed at the various stages in a 30-40 year period, and how savings and investments can deliver those needs.

Regularly revisit a financial plan to ensure it is still on track and to take into account any changes in their lifestyle or health. This could include if an individual wants to continue travelling for longer than originally intended or if they may have fallen into ill health and it may be better for them to switch retirement income products, such as into an enhanced annuity to increase the value of their regular payments.

Whatever the needs of our clients, one of the benefits of the greater flexibilities is that Lowes Consultants now have access to a larger range of tools and options with which to advise on people’s individual circumstances.