Martin Lines is development and events director at Just Group
Just Group development and events director Martin Lines talks to PA about the key adviser challenges in retirement planning and developments in blended income...
What are some of the key challenges planners are facing at the moment when advising retired or retiring clients?
I think we're all aware of the investment market challenges over the last few years. Whether an investment has been in equities, bonds or a combination, things have been volatile and many clients will have experienced a downturn in their fund values. If we couple that with a backdrop of high inflation and interest rates over the same period, people will actually need more income to do the same things they were doing previously.
This is a major challenge, especially if funds have fallen. Bear in mind too that amongst retired or retiring clients, many face additional time and financial pressures, as part of the 'sandwich generation', caring for both elderly parents and their own children.
What are some of the regulatory pressures?
One of the major areas that advisers need to contend with is the Financial Conduct Authority's thematic review of retirement income. There is certainly an onus on the risk to income over the longer term, but with the markets having performed in the way they have and, perhaps, people having lived through an element of ‘pound/cost ravaging', firms need to show how the income is going to be sustained in the future.
With Consumer Duty and vulnerability guidance, there is also a reminder that plans will need to adapt to cater for changing circumstances. This is reflected in the regulator's focus on regular reviews.
Why do firms need a different investment strategy for clients in retirement?
We've mentioned ‘pound/cost ravaging' or sequence risk. Volatility can be a major problem, particularly where high levels of income are being withdrawn. There are a number of other risks that also need to be accounted for, longevity risk being the major one – how do we make the income resilient over the retirement period?
For people who are entirely reliant on money purchase arrangements, this is especially risky. Rather than changing income into capital, this is now reversed – we are changing capital into income and the approach should reflect the risk to maintaining that income, not just growing the ‘pot'.
How has guaranteed income fared in this period of market turmoil?
Very well! Annuity rates have moved upwards by over 40% in some cases, making it attractive to place at least some of the income strategy into guarantees. Unlike the challenges of equities and bonds, annuity income is uncorrelated. These factors are important and annuities are always worth considering due to the impact they have on the rest of the portfolio. They can really help meet the challenges of sequence of return and longevity risk as well as providing psychological security.
Often planners talk about a guaranteed income underpin, but what would you say to people who still want to retain flexibility?
Yes, this concept has been around for a while. Analysing essential, non-essential and lifestyle income as a starting point can help to determine where that underpin should be. Clearly, there's more to it, but matching different income needs and risks to different elements of the strategy can make a lot of sense and allow for flexibility once the guaranteed element has been secured. With rates as they are today, the same level of income is likely to use a much lower fund value than would have been the case a few years ago, so even if fund values have fallen, clients may have more flexibility than they might think.
The concept of blending has been around for a while. What's changed?
We've done a lot of research on blending and partnered with a number of organisations to look at the longer-term benefits of adding a guaranteed income-producing asset to a drawdown arrangement. What we've found is that by replacing part of the fixed income investment with a guaranteed income element, clients can typically achieve higher long-term values, whilst improving levels of income sustainability.
Those higher fund values can be really important when it comes to legacy benefits or changing circumstances later in life. By having this all within a self-invested personal pension (SIPP), the amount of guaranteed income retained in the portfolio or paid to the client can be adjusted if things change.
Where do you see the future innovation in guaranteed income?
Most adviser firms use platform technology, so that is where we're focused for future development. We already work in that space and many firms have access to our Secure Lifetime Income via their platform and we're working with others. Having a guarantee within a SIPP is also beneficial from a tax planning point of view.
The solution is there and as this concept grows, the addition of guaranteed income assumptions to cashflow tools, risk profilers and other parts of the planners' ‘eco-system' will make it easier for more people to benefit. This will help firms meet the regulatory requirements, build-in long-term value and, most importantly, help clients to achieve a better retirement and later life.
Where can advisers get more detail?
For more information about guaranteed income on- or off-platform get in touch with your normal point of contact at Just or look us up at justadviser.com
Martin Lines is development and events director at Just Group
