Retirement planning has become something of a science. As government support for later living has been rolled back, final salary pensions scrapped and lifespans extended (there were 13,170 centenarians in the UK at the last count) every citizen is being expected to take more responsibility for their later years.
Nevertheless, it can be extremely difficult for individuals to save enough to pay for the lifestyles they want for a 20, 30 or even 40-year period. Research by the Pensions and Lifetime Savings Association in 2018 warned that 30 million people were at risk of running out of money during their retirement.
To help people solve this complex puzzle, financial advisers are turning to technology, supplementing their own financial expertise and knowledge of their clients’ individual circumstances with software that models cash flow for decades ahead. It ensures that people will have enough money to spend, even if they live for a very long time indeed.
Modelling cash flow
Sanlam Wealth Planning Director Michael Angus says: “We use sophisticated cashflow modelling to forecast our clients’ future finances. It shows us in real time how much money they could have in the future and whether they are on track to achieve their goals. We plug in the numbers in terms of the assets someone has, such as the pensions they are contributing to, their investments and their business assets, and anything else they have that could provide them with an income. We then factor in things like the State Pension and make sure they will have enough to live the best life possible with the money they have.”
In fact, the software is sophisticated enough to handle everything from ISAs and unit trusts to buy-to-let properties and even assets like a classic car collection, although it can be difficult to calculate how much such an investment will grow in the future. “It could be assets we can’t really advise on, using classic cars as an example,” says Angus. “But if we know you’re planning to sell them in five years and may get £200,000, we can factor that into your overall plan.”
The technology helps advisers future-proof retirement income. It takes into account inflation, expected growth rates and likely expenditure to the age of 100, but such a long time horizon doesn’t have to mean money is tight in the early years, particularly as people often need much less spending money when they reach a great age. But it does provide peace of mind and plans are usually reviewed at least every year and can be adjusted to meet changing needs.
The software can help advisers as they guide you towards reaching your retirement goals. “The key thing before we get to how much money, is what would you like to do with the rest of your life?” says Michael. “Once we’ve discovered what our clients would like to achieve, we can assist by putting a monetary value to their goals, and then we’ve got a target to aim for. If you want to retire early that’s great, but when will that be and how much income will you need? If you want to help out your family in future, that’s also fine, but what does it mean in black and white?
“Some people have high salaries in their working lives and want to continue with a high income when they retire. What we do is make sure what they want is actually viable and realistic. If someone says, ‘my objective is to spend £100,000 a year in retirement at age 60’, we will run a scenario to see if they are on track to achieve that based on their current situation.
Discussing the options
“If it turns out that they are potentially heading for less than this then we can discuss their options to make up the shortfall. For example, can they afford to invest more now, will they definitely need £100,000 every year or just in the early years of retirement, will they look to downsize at retirement and release capital from their property, and what if they retired a couple of years later?”
If you’re lucky enough to have a defined benefit, or final salary pension that gives you a guaranteed income for life, that would also become an important part of your cash flow in retirement. You may be offered what seems like a very large sum to give up the guaranteed income and this can appear very attractive. Michael explains: “That would form an important part of the discussion. In most cases we know that a defined benefit pension will give you so many thousands of pounds in income a year and maybe some tax-free cash as well. As there are so few guarantees in life, it can be very valuable to have guaranteed income in retirement.”
If you have several pensions, amalgamating them so that they are easier to manage can seem like the right the thing to do. But Michael warns that even this has to be very carefully considered because different pension schemes offer different benefits and you run the risk of losing some of these without a proper review.
Some older pension schemes may have guaranteed annuity rates that are two or three times higher than what you could get today, while others could allow you to take more tax-free cash than the 25% currently allowed. On the other hand, some may have been set up to buy an annuity and wouldn’t give you the opportunity to take advantage of the new pension freedoms.
Planning for retirement means working out the costs that are likely to arise. It’s fairly easy to predict such things as council tax and heating but travel can be a more complex issue. Some people want to enjoy one big trip around the world and others want two or three foreign holidays every year. And then there are pre-retirement costs that can eat into your savings, such as a child’s wedding or helping a son or daughter onto the housing ladder. Making substantial gifts to a child can attract a tax charge and that, too, has to be considered when planning for a long-term retirement.
While retirement planning is a complex task, the combination of human expertise and empathy, together with the latest software can really help people enjoy their later years, explains Michael: “The last thing we want is for someone to have worked all their lives, built up their assets and then get to retirement and be too scared to enjoy their money. I’ve had quite a few clients who are almost afraid to spend their money. With effective ongoing planning we can give them the peace of mind that they can afford to do the things they enjoy with their hard-earned money, without the fear of it running out in later life.”
7 steps to pensions planning
A financial adviser will go through some key steps to help you make sure you have enough money in retirement:
1. Discuss with you how much you think you’ll need to spend each year to enjoy the lifestyle you want.
2. Find out from you when you want to retire and what your lifestyle aspirations actually are (i.e. do you want to travel around the world?).
3. Understand all the assets you have, from pensions and investments to buy-to-let properties and classic cars.
4. Use cashflow modelling software that will factor in assumed growth rates as well as inflation and other costs to work out possible income up to the age of 100.
5. Advise you of any action you need to take to reach your goal, such as saving more or changing your planned retirement date.
6. Discuss with you whether you should amalgamate your existing pensions.
7. Help you understand what you should do with any defined benefit pensions that could offer you a guaranteed income.