This article originally appeared in the autumn 2017 edition of Telegraph magazine. Read it online now.
With the recent Government announcement that retirement age will rise faster than anticipated in coming decades, Telegraph speaks to Senior Financial Planner Sally Key about the challenges she expects to see in coming years
Starting her professional life in the mid-90s, Sally Key has seen a lot of change. Alongside the ups and downs that you’d expect working in the financial services industry, she’s witnessed changes to legislation, the effects of the internet and, of course, financial crisis. In that time, pensions in particular have seen plenty of transformation, not least with the curtailment of a number of final salary schemes.
“Pensions is where my career began,” Sally says by way of introduction. “I started off at Norwich Union, where I was trained to do financial planning, with a focus on retirement and pensions.
“In 2005, I moved into the corporate world at Sedgwick, where I was employed to look after the installation work for stakeholder pensions at a time when businesses were shutting down their final salary schemes. From there, I took a role at Gerrard Investment Management [now part of Barclays Wealth], where I looked after high-net-worth individuals.
“Although retirement planning has been my focus, I have been involved in all aspects of financial planning, including investments and tax planning. One thing has an impact on another. You can’t just do one bit of it.”
One of the biggest changes in recent years has been the introduction of what are known as pension freedoms in 2015, which means you have greater flexibility when it comes to taking your pension benefits.
“Pension freedoms mean that more clients are coming to us for information about how this affects them,” Sally explains. “That involves advising what they should do with their pension pots and the associated pros and cons of those options.
“Much of my role is focused on putting clients in the position where they have the information they need to make a decision,” she continues. “I can put forward a recommendation that I feel is in their best interests, providing them with all the associated facts so they can decide whether or not they want to pursue it.”
One of the main reasons for people to consider options other than annuities include succession planning and the ability to pass money on to the next generation.
“If you buy a conventional annuity, it will provide a fixed income throughout your retirement, but that will cease when you pass away,” Sally explains. “If you’re planning to pass funds on to loved ones, you may want to consider a drawdown pension instead. However, the suitability of this option depends on your attitude to risk. In this case, the money is invested and the pension comes in the form of a regular income. If there’s any of the original investment left when you pass away, that can be gifted to your children, and it isn’t subject to Inheritance Tax.”
While that sounds like a logical thing to do, it should be pointed out that this is a simplification of a drawdown pension.
“It’s worth bearing in mind that once a conventional annuity is placed, it’s done,” Sally explains. “There are no ongoing investment decisions. With a drawdown, however, you need to make ongoing investment decisions, so you’ll need professional advice all the way through.
“That is really important to note, especially with an ageing population. My clients make sure that they’ve got power of attorney in place so that I’ve got permission to make investment decisions if they are unable to in future. It’s likely the need for this service will grow, so it’s vital to work with a financial adviser you trust.”
Living to 100
With the mention of an ageing population, it’s the perfect opportunity to explore the current news agenda.
In early 2017, headlines were dominated by the announcement that the retirement age for women is set to rise from 60 to 65 by 2018. It will then increase to 66 for both men and women by 2020, and then to 67 by 2028, with ongoing reviews of the retirement age taking place every five years.
Shadow Work and Pensions Secretary Debbie Abrahams estimated that these changes will affect 34 million people in the UK. The people that will be most affected are those without final salary pension schemes and insufficient savings in other types of pension.
The reasons for these changes must be viewed against the backdrop of an ageing population and falling birth rates. According to the World Economic Forum’s We Will Live to 100 study, the life expectancy of a child born in 2007 is 103. But there are fewer people being born and entering the workforce to support those people in old age.
The life expectancy of a child born in 2007 is 103
It is estimated that by 2050 there will be four working people supporting one retiree; in 2017 it’s eight to one. What that means, in simple terms, is that there will be fewer people paying into the State Pension to support the growing number of pensioners.
Read more: Why women need to pay attention to pensions
Says Sally: “Private pensions and cashflow modelling are important for our clients. Unless their retirement fund has been very cleverly invested, we need to estimate when it’s going to run out. There is a risk of that happening and it’s one of the biggest issues with final salary transfers. If you have a final salary pension, you’re guaranteed a set income for the rest of your life, which is index-linked with inflation. If you transfer it out, yes, there are great options for succession planning but how long are you going to live? Are you going to run out of money if the investment doesn’t work out?
“To get started, I sit down with my clients and say: ‘Imagine your debts are all paid off. How much money do you need to live on today?’ Then I factor in an agreed assumption for future inflation rates to get a figure. I then ask when they want to retire and I work back from there: How much capital would they need to achieve that income? How much should they be paying into a pension every month to achieve that?
I then ask when they want to retire and I work back from there
“It’s about having realistic expectations. Lots of people say their pensions are rubbish, but that’s because they haven’t paid enough in. Had they taken an active involvement in that process and worked out what a certain type of retirement lifestyle would cost, they could work towards it by reviewing their plan on a regular basis. If they save half the amount they need, they have to expect their plans to be affected. In our job, we do have to have quite a lot of difficult conversations, because we need clients to have a realistic understanding of their plans, so we can manage expectations. That’s why cash-flow modelling is so important – because it allows me to work out how long their funds are going to last and provide realistic expectations.”