What is Retirement Planning and why do we have such a problem with it in this Country?
February 17th, 2010 Investments, Retirement PlanningWhat is Retirement Planning and why do we have such a problem with it in this Country?
On the face of it the first part of this question may appear to be simple and if 100 people were stopped in the street and asked to provide an answer the vast majority would undoubtedly give a response that would refer in some way to saving in to a pension plan.
It can be argued that this stock response and the thought processes that lead to it have largely been created by media headlines driven by the Government who wish to highlight the substantial “pensions” deficit that currently exists in the UK today. This is not unreasonable as they hope that such action will encourage us to save more for our retirement thus taking some of the pressure off the state.
Unfortunately the same headlines are also quick to inform members of the public about the instability of pension schemes and to tell headline grabbing horror stories of some people have suffered through no fault of their own, and have lost of all of their pension savings.
The net result of all this is that people know they should be doing something in terms of planning for their retirement and believe that the correct product to solve their problems is a “pension”. Unfortunately though they simply no longer trust “pensions” as a way of providing them with a stable retirement income and hence end up committing the worst retirement planning crime of all which is to take very limited action or no action whatsoever.
This is a perfectly natural response and is completely understandable as retirement brings with it the loss of the most valuable financial resource we have in our lives, our income. With this loss of income comes a much greater feeling of insecurity and financial concern. As such if we are to save money to help support ourselves during this period of vulnerability at the expense of our lifestyles today, we want to ensure that at least it is money well spent. Therefore it is imperative that the entrenched concerns that people have with regard to retirement planning need to be overcome if they are to plan successfully for their later years and achieve a good standard of living when they finish work. In order to achieve this we need to begin by understanding one simple fact:-
• Retirement planning is not simply about buying a pension
What does Successful Retirement Planning Encompass?
To understand retirement planning we need to think about far more than just a savings plan. We need to understand that people’s lives are complex and that they are likely to have series of different income and capital streams or resources available to them over their working lifetime, as well as different forms of debt that need to be repaid. It is how we best go about capturing some of these different resources and paying off the various debts and most crucially understanding how they all interrelate, that will ultimately result in a successful retirement plan for an individual, couple or organisation.
- Examples of different resources that could be used to help fund retirement planning may include:-
- Existing ISA, PEP, Unit Trust or share portfolios
- Capital from the sale of a business
- Rental income from Buy to Let or commercial property
- Income or capital from family Trusts or wealth that will inherited in the future
- Capital from the downsize of a property
- Capital or income produced by releasing of equity from a property
- State pensions and other state benefits
- Existing Life Assurance Plans
- Occupational pension schemes
- Personal pension schemes
- Cash savings
- Continued work in retirement
How do we go about Building a Successful Retirement Plan?
In simple terms is it about building a “Retirement Roadmap” for the client. In order to do this we need to work through a logical progression that involves identifying what it is the client wants to achieve, identifying where they are now, qualifying and quantifying where any over provisions or shortfalls exist, prioritising the clients objectives and implementing any recommendations. We then ensure that the plan is structured in the most tax efficient manner with respect to Income Tax, Capital Gains Tax and Inheritance Tax. Finally we agree an annual review date to ensure that the Retirement Roadmap remains fixed firmly on its destination prior to and throughout retirement.
In brief, it is about making the very best use of any resources a client has available and being strident about the protection of those resources.
The stages of constructing a successful Retirement Roadmap are detailed below.
Objective Setting
During this part of the process we identify what it actually is that the clients want to achieve. This will involve detailed discussions with the client during which we will do the following:-
- We identify and quantify the level of income they will need to support their day to day living expenditure through the use of detailed projected expenditure analysis.
- We identify and quantify any debts that need to be repaid.
- We identify and quantify any specific capital expenditure goals they may have.
- We identify and quantify any Long Term Care needs that may arise.
- We identify and quantify the level of income that would be needed for a surviving spouse or partner following the death of their loved one.
- We identify and quantify any gifts they may wish to make to immediate family members, other relatives or friends, charities or religious organisations.
- We obtain an understanding of their attitude to money and the importance they place on it with respect to their retirement planning.
- We identify what the individual or couple would want to happen to their estate on their death and what their attitude to tax is.
- We identify and quantify the client’s attitude to investment risk through personal discussion, practical example and psychometric testing.
- We identify and quantify the time scale of the Retirement plan.
Information Collection and Documentation
After we have obtained clear retirement objectives we then collect the necessary information from the clients concerning their existing financial position. During this stage we build a comprehensive picture as to what assets, income streams debts and existing estate planning provisions the clients have in place. This involves corresponding with some or all of the following:-
- Life assurance companies
- Investment houses
- Pension schemes
- Stock Brokers
- Banks
- The Pensions Office
- Mortgage or other credit providers
- The clients Accountants
- The clients Solicitor
Once this process is complete we now have both the starting point and the destination for our Retirement Roadmap. In other words we know where the client is now and where they want to go, all we have to do is to work out the route. This then enables us to move on to the third and most important stage.
Retirement Forecasting
During this stage we utilise bespoke software that builds a lifelong financial forecast for the client based upon the client’s objectives and the resources they have to plan with. In simple terms it is a business model or cash flow projection using actual client figures.
It encompasses all the clients current and future sources of income and capital and when they may fall due, it then sets against these the current and future expenditures and debt, that the client needs to make good and to achieve the lifestyle they wish to lead.
This enables the client for the first time to see visually and quantitatively where any problems will lie within their retirement planning and most critically to be able to begin to quantify how much their plan will cost them to achieve. Each individual goal can be isolated and quantified such that the client is then able to prioritise what is most important to them and what they therefore wish to fund. The software provides the Retirement Planner and client with specific recommendations regarding how much capital or regular contributions will be required over what time periods to successfully navigate the route from the starting point of the Retirement Roadmap to the destination.
By taking this action we remove a huge degree of uncertainty from a clients mind as they will then know with a very good degree of certainty how big their retirement income will be and therefore what lifestyle they will be able to live. Most importantly we can make sure that the very best use of all the clients’ resources is made creating a highly “efficient” plan with very little or no waste.
This forecast forms the foundation of the retirement plan and provides the context within which all Retirement Planning advice is given. Without it, meaningful and objective advice simply can not be given.
Implementation
Having identified where a clients problems exist you are then in a position to be able to produce the Retirement Planning recommendations. These should involve detailed instructions as to how the client should invest any assets they have, where and how they should take income in retirement to best utilise their tax allowances and how to structure their estate planning, draft their wills and complete their life time powers of attorney.
How do we go about Successfully Maintaining and Updating our Retirement Plans
Reviewing the Plan
Whether the plan is drafted a number of years before retirement while the client is still working or at retirement it should be reviewed each year to take account of changes in the clients circumstances such as health, investment returns, changes in legislation and taxation and alterations to objectives. Each year the forecasts should be updated with current client information, investment valuations and changes in tax and legislation. It should then be re-run to establish whether or not the client has gone off course from the planned destination. If they have, alterations and changes can be made to bring them back target. If this is done then the Retirement Roadmap will have the best possible opportunity of remaining on course and continuing to provide the client with the peace of mind that they require in retirement.
Nick Crabbe BA Hons CFP
Director Baxter Fensham Ltd
Baxter Fensham Limited is authorised and regulated by the Financial Services Authority
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