Pension freedoms give people a wide range of options. This is undoubtedly a good thing for clients, but with freedom comes responsibility. Clients will need to manage their money to ensure that they have enough to live comfortably for the rest of their lives, to cover any emergencies, and to pass down to future generations if desired. They may therefore need to make important decisions at various points throughout their retirement. The options are complex, and will require careful consideration and planning.
This is why many more people than ever before will need financial advice. Communicating the pension freedom changes to clients can be challenging, and explaining the value of the advice you can give has never been more critical. Using a tax policy framework, withdrawal policy framework and investment policy framework, which together make up your centralised retirement proposition (CRP), can help you communicate the value of your advice – all the way throughout the process.
Our video explains what the pension freedoms could mean for your client
The pension freedoms have brought added complexity to the choices clients now face – a level of complexity many people will not understand. This must be communicated to them so that they fully understand the value of the service that you provide them with.
Whether clients plan to retire fully, continue working for longer, or reduce their hours, they can now decide when and how they take their retirement money to fit in with the lifestyle that they want. And it's not just about their pension savings, all their accumulated wealth now forms part of your retirement advice.
There's a lot to weigh up when working out which options will provide clients and their dependants with a sustainable and tax-efficient income that will last them throughout retirement. That's why it is important that they seek advice from you.
The following is a summary of the key points that you can use to help your clients understand the list of options they have following the pension freedoms. You can also download our Retirement Options Guide (Doc, 65KB) to use with your clients when you meet them – this will explain these rules and outline the differences between the different options:
Note: the below list assumes that any Tax Free Cash allowances have been utilised as appropriate
In addition to the above, if your client is aged over 55 and has any small pension funds with values of £10,000 or less each, they may be able to take those as lump sums irrespective of the value of their overall pension benefits. Taking small fund lump sums will not impact your client's ability to continue pension saving as it does not trigger the lower Money Purchase Annual Allowance, and they also do not use up any of the client's Lifetime Allowance. The number of small funds they can take in this way is restricted to three for non-occupational pensions (such as personal pensions, retirement annuities, stakeholder pensions) but is unlimited for occupational pots (such as final salary schemes, occupational money purchase and public sector schemes).
If they have not previously taken benefits from the scheme paying the lump sum, normally only 75% of the lump sum will be taxable (as pension income). The other 25% will be paid tax free. If the lump sum is being paid from pension savings that they have already put into payment the whole lump sum will be taxable as pension income.
Remember – this list outlines many of the choices your clients have as a result of the pension freedoms, but a client can also choose to leave their pension pot untouched and draw an income from another source such as an ISA or Bond. We will look at the best wrappers to draw an income from in the ‘Making your recommendations – Tax' module.
Communicating the value of advice can be challenging. Like with most services, it's difficult to show people how they can benefit from something intangible. One of the more successful ways to overcome this challenge is by using case studies. Case studies allow you to actually show your client how you've helped someone else in a similar situation to them, and how that person benefitted from your help and support.
There are two types of case studies: factual ones and fictional ones. The advantages of factual case studies are that they can provide a wealth of detail, give credibility to the situation and provide real outcomes. Fictional case studies are usually more loosely based on real situations but can still be useful when illustrating capabilities.
The below is an example of a case study that you could use with your clients to demonstrate your value.
PLEASE NOTE: The following example is a fictional case study that you may use with your clients to demonstrate the value of advice. In reality, the adviser should also consider other factors including what property the couple own and any issues around IHT, but for the purposes of this example we have not focussed on these. This wording has been prepared as a general style and is for information only. You should satisfy yourself as to the appropriateness for your clients and ensure that it is kept up to date and meets your requirements. No responsibility is accepted by Standard Life for any specific problems caused by reliance on, or use of, this general style which is used at your own risk.
Sarah and Matt visited ABC Advice Services for a review of their current financial arrangements. Sarah is 56 years old and Matt is 57. They are married, and have three grown up children, with families of their own. Sarah is a retired Head Teacher with a pension income of £30,000 a year. Matt is a solicitor earning around £145,000 a year, and is therefore a higher rate taxpayer. Matt hopes to retire early, although hasn't decided exactly when. They are keen to prepare for Matt's retirement and want to understand more about the pension freedoms. They currently have £500,000 in Matt's personal pension and £90,000 across a number of ISAs invested with different providers. They also have sufficient cash on deposit to meet their short term needs.
The adviser at ABC Advice Services began by gaining a thorough understanding of their current financial situation, including a detailed discussion about their future plans and aspirations. This helped both Sarah and Matt to consider what was most important to them, in order to clarify and agree their financial goals and objectives. The adviser helped them to prioritise their key goals, which were:
After establishing these goals, the adviser worked with Sarah and Matt to assess their future income requirements. This included considering how these may change in future, based on the key goals they'd already identified.
Following the meeting, using the details provided by Sarah and Matt, the Adviser used portfolio analysis tools to measure the risk and potential returns for each of their existing pension and investments, to compare to the investment strategies agreed.
The adviser then built a comprehensive financial plan to meet each goal with an appropriate investment structure and associated tax planning.
The investment structure recommended involved separate investment portfolios, matched to their different goals. Each portfolio has exposure to a wide range of asset classes, aiming to maximise growth while being managed to the appropriate level of risk. The portfolio linked to Matt's retirement needs takes into account his need for greater security in the short-term before he begins to draw income.
By using a tax policy, the adviser was able to set out exactly how he would use Sarah and Matt's various tax-wrapped holdings. This reassured Sarah and Matt and helped set realistic expectations
Our initial fee takes into account the complexity of advice given and the value of assets under advice. ABC Advice Services has provided initial advice on Sarah and Matt's complete financial plan, including retirement planning, investments and estate planning. The fee for this initial advice was £6450 (1.09% of assets).
The ABC Advice Services Adviser has agreed with Sarah and Matt that regular reviews of their financial plan are essential for a smooth transition into retirement. As that time approaches for Matt, their finances can be restructured to design a tax-efficient income strategy, with the aim to make his savings last as long as he needs them to. They have agreed that an annual review will be sufficient over the coming few years, until Matt retires, and then they may well increase the level of service. This will allow them to regularly review actual spend in retirement and performance of their invested assets. They might also want to consider their options around transferring wealth to their dependants.
The ongoing fee payable for this service will be based on the valuation of their assets under advice. On the valuation date the charge would be established for the upcoming year. Based on Sarah and Matt's current asset valuation of £590,000 the fee would be £4,400 (0.75%). Additional charges would apply for Sarah and Matt's specific products and investments.
Being in this service ensures Matt and Sarah have access to a dedicated adviser who can help them make the right decision at the right time, staying on top of the ever changing financial, regulatory and tax rules.
Download this case study (Doc, 170KB) and adapt it for use with your clients. This is in word format to allow you to edit and apply branding as desired
Investment policy: the difference between accumulation and retirement
Clients in retirement who decide to keep some of their money invested have to understand that they will need to adopt a different approach. Previously they were trying to maximise growth for the future (accumulation). From now on, they will be making withdrawals (decumulation). As a result they face new risks:
The right advice and investment strategy can mitigate these risks. This is where an investment policy comes in.
An investment policy sets client expectations and reinforces the suitability of your recommendation, in co-ordination with your firm's ‘in retirement' investment proposition. It should help to avoid ‘panic calls' from clients in falling markets, as they have a plan which they can stick to. A repeatable process will also ensure consistency across your business, reducing risk and increasing efficiency.
Explaining the complexities of your retirement investment strategy to your clients in a clear and methodical way. It also instils discipline in your business that the relevant advice has been given, and that clients are aware of what is happening.
The ‘Making your recommendations - investments' module includes more information on implementing an investment policy.
Clients need to understand the impact of market conditions on their retirement income levels.
Telling clients about this is likely to worry them, as market conditions are completely beyond their control. However, putting a plan in place for different situations that may arise should reassure them. It also helps to set realistic expectations for their retirement income. The key here is a withdrawal policy.
The withdrawal policy aims to set client expectations on how future income will be managed.
Setting out a plan of what will happen given some highly probable scenarios will help clients to understand that their income is not certain. It should also reduce the chance of them panicking if the market falls (or making the emotional and irrational decisions that can follow). It can also be used as the basis for your annual client review discussions.
The policy helps clients to understand that their income is not certain, and will change in the future. It also instils discipline in your business that the relevant advice has been given and that clients are aware of what is happening.
The ‘Making your recommendations - withdrawals' module includes more information on implementing a withdrawal policy.
Pension freedoms mean that many people will be looking for advice for the first time. These clients probably will not know the value of some of the key areas that advisers can help them with, including tax planning, so you need to show them how important it is. While this is something you will already be doing as part of your BAU processes, you will find that a tax policy is also extremely useful.
A tax policy is an agreed process which sets out exactly how you will use your client's various tax-wrapped holdings. It will help to set client expectations, and it will also show them the value of your advice (as they probably could not do this themselves). A tax policy is also a good discipline within your business. It ensures that you take a consistent approach across all ‘in retirement' client advice processes, improves your risk controls, and provides evidence of actions taken and client approvals.
It explains the complexities of cross-product tax-efficient withdrawals to your clients in a clear and methodical way. It also instils discipline in your business that the relevant advice has been given, and that clients are aware of what is happening.
The ‘Making your recommendations – tax' module includes more information on implementing a tax policy.
Please complete the self-assessment questions in your workbook. You can check the answers yourself at the back of the booklet.