Surviving retirement

Panel:

-    Paul Squirrell, Head of Retirement and Savings Development, Fidelity Adviser Solutions
-    Tom McPhail, Director of Public Affairs, the lang cat
-    Sam Secomb, Chartered Financial Planner, Women’s Wealth
-    Toby Bentley, Financial Adviser, Lathe & Co

Paul Squirrell: Good morning, everyone, and thank you for joining our ‘surviving retirement’ webinar. I'm sure you're all aware of the challenges facing the industry today. In recent years, we've seen a shift away from defined benefit to defined contribution schemes and a general freeing up of the pensions market designed to give consumers more flexibility in how they can access their benefits in retirement. Added to which, we're living longer than the State Pension was originally designed for and have recently experienced inflation levels at a rate not seen in a generation. 

So, it falls for those of us in the industry to help guide our customers to cope with these pressures. Joining me to discuss all of this is pensions policy expert, Tom McPhail, from the lang cat, award-winning adviser and advocate for women's financial wellbeing, Sam Secomb, from Women's Wealth, and regular FT and Bloomberg contributor and another award-winning adviser, Toby Bentley, from Lathe & Co. 

So, Tom, if I can start with yourself, just remind us of some of the challenges facing advisers and clients today as we come up to retirement. 

Tom McPhail: Thanks, Paul. I think the context is really interesting when you take a step back and look at where we've come from. And, so just very briefly to remind your audience, you can go from pension simplification in 2006, the global banking crisis in 2008, which led directly to all the chipping away of the pension tax allowances we saw from the coalition government from 2010 onwards, all the different reductions in the lifetime allowance and so on. We've had auto enrolment fixing the front end of pensions to a large extent with bringing people into the pension system. Then we had State Pension reform in 2013, and then of course that bombshell of pension freedoms in 2014/15. 

So, any one of those would have been a big reform in their own right. And, I think it's also worth noting that, since 2015, we've also had a particular economic environment where, barring the odd wobble, the stock market's been pretty benign and investments have done okay. And, at the same time, we've had rock bottom interest rates, which have perhaps created a slightly distorted environment and, of course, that's changed very significantly in the last year. So, for people managing retirement incomes, not only have we had a lot of disruption over the last 20 years – constant change – but also, we’ve had a particular economic environment which is now shifting quite rapidly and doesn't really give us a pointer for how things might go on from here on in. 

Paul Squirrell: I think it's a really valid point because you're right, we have seen benign conditions in recent years. Sam, it would be fair to say, looking ahead from now, it doesn't quite seem like it's going to be the same landscape going forwards, does it? 

Sam Secomb: No, and we were lulled into a bit of a false sense of security, I think. One of the advantages of having a bit of age on me is I remember it when it was different. But actually, I also got very used to having low for long interest rates and not really seeing anything very dramatic happening. And then, all of a sudden, we've got all of these massive swings. We had a global pandemic, all the anxiety that that brings on, the changing in people's thinking, with this backdrop of volatile economics, it's really quite challenging for advisers and for the clients. So, I think we have to navigate that and we have to have our vision up in terms of the fact that it's not going back to how it was, probably, but we don't know what it's going to be. 

Paul Squirrell: No, and you mentioned there about clients and that's something that interests me. So, I'll ask you this one, Toby. How does it affect somebody coming to retirement? Because, of course, while you're saving for retirement, it's just about making as much money as possible. But the psychology changes when you know you're going to give up work and this is what you've got to live on. 

Toby Bentley: Yes, totally. There's a massive psychological shift from that sort of initial accumulation phase where, like you say, people are working, they're earning, they're also saving. And then you've got to go through that shift where you put the practice into place where you've talked about drawdown strategies, you've talked about spending money, but that actual shift of physically stopping your earnings and withdrawing money for the first time, it's a big psychological shift. It takes a bit of adjustment. Then, typically, you'll see spending patterns change throughout retirement, people spending more at the start, for example, when they want to travel more, they want to go on holidays, maybe plateauing in the middle, and then increasing again later on in life. But those spending patterns are really dictated by that first transition. 

Paul Squirrell: Can I stay with you on that one, Toby, because, bringing this together, somebody walks in and wants to talk about retirement, they want to retire. Where do you start? 

Toby Bentley: Yes, you've got to start, fundamentally, with the client situation as a whole. So, small things, working out what does retirement means to them? What age do they want to retire? How much do they want as an income in retirement? What do their health implications mean for that sort of stuff? And do they want to leave money to the next generation? From there, you can work backwards to look at their overall asset position. What assets do they have? Do they have variable assets – defined contribution pensions, or other investments? Do they have fixed assets? So, defined benefit pensions, annuities, State Pensions? From there you can start putting together the basis of a withdrawal plan. 

Tom McPhail: How much of a coaching process is that because my sense is that for a lot of people in that situation, maybe in their late 50s or the early 60s, they've been through phases of their life where everything was reasonably predictable and understood. And then what they do next, how they live their lives, what activities they want to pursue, how much income they're going to need at the age of 65 and 70 and 75 and 90 – that's very hard to gauge and very hard to judge. And I get the sense, quite often, people actually don't know how they're going to live their lives. So, is there a coaching process that goes through that as well? 

Toby Bentley: Yes, definitely. There's an interesting point you raised at the start about the shift from DB to DC income immediately has moved the onus from employers and providers straight to the consumer. So, people are going to be spending their money and the risk of exhausting their pot is much more prevalent now than ever before. But yes, the coaching, it ranges across a broad spectrum from people who have an understanding of what they want to do, but maybe they just want to talk it through to sort of nail down their plans, all the way to people who have really not even thought about it and really in the thick of actually just building that pot. So yes, the coaching part of it plays as big an element, I think, as the fundamental advice part of it as well. 

Paul Squirrell: We've talked a lot about pensions, etc., but is coaching needed in terms of actually saying to somebody, well what are your assets for retirement? It's not necessarily just about the pension, is it? It could be all of your assets. It could, dare I say it, even include your main residence as well. So, is too much emphasis made on it all being about pensions, do we think?

Sam Secomb: I think the point about financial planning is that it's all of the finances – and it's all of the finances throughout your lifetime. So, whatever point we meet a client, we're planning from that point forward, it's just that there will be a point, probably, at some stage in their lives – and not always these days – where you're not earning. So, gone are the days when people got to 65 and retired. It just doesn't happen anymore. That was the DB environment, wasn't it? 

These days, people generally take their foot off the gas a bit – they have a decade often where they're still earning quite well, they're just not full-on acceleration anymore because they're not looking for that final salary to be a certain number. And they're tired. They've got lots of knowledge and skill to pass on but they're just not as energetic as they used to be. So, they back off a bit and then they have time for hobbies, which they then turn into earnings opportunities. So, you end up with people actually working much, much longer because they want to, because they can. And you've got to design a plan that can fit around that. 

The tax legislation means these days we spend the pension last. The onus is to a create a pot – we’ll give you tax incentives to create a pot and then we'll give you tax incentives not to spend it. That's where we are at the moment – spend your other assets first, support your lower earnings period using these other assets and die owning the pension – treat it as the contingency pot for long-term care or other surprise or “maybe” costs that could come up in your retirement plan. 

Tom McPhail: You mentioned long-term care there. How much of a concern is that for your clients? Because you both advise clients, you're both on the front line, that sense of I want to keep a bit back because I might need that later on, I don't want to have to rely on the State because, probably, everyone's aware that relying on the State for later life care is not a good place to end up. How much does that feature in the planning exercise? 

Toby Bentley: As Sam mentioned, all considerations across all clients are going to come into this. I think one comment I'd probably say to start this is, with all retirement planning, the risk of dying with a little bit too much money is probably less of a risk than running out of money. So, from that point of view, I'd say, yes, ending life with extra assets always trumps running out as a starting point. 

Tom McPhail: So, that’s the calculation of how much can I live on because I want to enjoy my life as much as I can, particularly in my 60s and 70s, when I'm still perhaps more physically active, so give me the maximum income you can now whilst also making sure I don't run out later on? That, which is what you guys do, is not easy, is it? 

Toby Bentley: Not at all. There are some great Morningstar reports that give us some headline figures for what is probable in terms of drawdown numbers, and we might go through this in a bit more detail, but if you look at a 30-year period, which we can debate whether that's suitable these days, but for a 30-year retirement period, Morningstar released reports saying a 3.8 withdrawal number sits, I think, at about a 90% probability of not running out by the time you've been through a 30-year retirement period. So, I always hesitate to give percentage numbers because, within the context of having guidelines, there's got to be flexibility. 

Tom McPhail: There's got to be, yes. There's got to be those yearly reviews because, whatever you predict, that's not what will happen – over the long term, as an average, it might play out that way, but some years it'll be plus ten, some years it will be minus ten. 

Sam Secomb: I think that's the exact point about averages – they hardly ever happen. And what we're talking about is very well-crafted plans that fit around a client's circumstances as they anticipate them. And even as we do that, as we build a plan and we anticipate change, even if we can help a client identify when they want to retire, how much they're going to need, we then have to expect it all to plan out that way, and it just doesn't. 

Paul Squirrell: That's a really interesting point because, what we're talking about here, what clients’ needs may be. Toby, you touched on there about sustainable interest rates – is it about sustainable interest rates? Is it about what does the client need and shaping out from there? You mentioned counselling – is part of this about the counselling about expectations? Is part of this about telling somebody whether they can retire and what sort of income they can live on? 

Sam Secomb: Yes, I think clients do look to us for some sort of guidance on what's possible. But the truth is that there are so many variables that everyone's going to have to stay flexible. What we do need to do, as Toby said, we need to help clients understand the risk they're introducing at the level that they're spending. So, sustainability is always going to be an important thing. And when you drop something like a long-term care bill into the last couple of years of a plan, it blows it up, so you need to play those scenarios. That's why I think financial planning is hugely important – stress testing so that you know where the risks are and what assets you might then use in an emergency to rescue yourself from a plan that's failing. 

Tom McPhail: And then having those ongoing reviews. So, every year you're going to see how things played out over the last year. Oh, you've earned a bit more income. Well, your investments haven't done quite as well. We need to rebalance this. You've got to keep doing that, haven't you? 

Sam Secomb: And their circumstances change, particularly around health when you're talking about a retired generation. A health change can change the way they think and behave and feel about their planning. So, you would have to adjust everything quite quickly. 

Paul Squirrell: If I just go back to the thing you mentioned about risk. We've probably had more questions on this than anything else – about retirement propositions. A lot has been written about retirement propositions in the past. Is it a CRP or a centralised retirement proposition or a centralised investment proposition? We've added considerations about withdrawals. Does it require a different approach in retirement? Toby, you've talked about a 30-year period, so you can't be too conservative, can you? 

Toby Bentley: Going back to Tom's earlier point about fundamental shifts in markets at the moment, how much of that do we then have to re-evaluate, things like our cash flow modelling in terms of timeframes and our investment expectations? All of these models expect 30-year retirements, 5% growth rates every year. Are these still suitable? And that's going back to your point about how suitable these things are. These change over time and that's going to be a common theme across this conversation and it just needs constant review. We’ve got to challenge, not only should clients be challenging advisers on their plans, but also, we've got to be challenging the expectations that the parameters that set out some of these retirement models. 

Sam Secomb: I think Fidelity published a paper on how to judge what is a decent drawdown rate on a pension and looked at some of the research and there have been quite a few studies done with different lenses on this and the truth is that there are so many dynamics at play that it's got to be an annually reviewed dynamic plan for the client. But you can use those guide rails to say this is a reasonable starting point and we need to be prepared to adjust our thinking over time as we experience investment returns and risk. 

Paul Squirrell: I suppose what I'm saying is most say advisory firms are used to running some sort of centralised investment proposition. Do you need to start with a blank canvas for your retirement proposition or is it that proposition over there with a slightly different approach? 

Sam Secomb: I have seen different researched pieces on this and, as an adviser, I've taken my own stance. I'm a total return fan. I think when you lean too much to income, you change the dynamics of the portfolio to the extent where you expose the client to risk – you've got a more focused portfolio and greater risk. I prefer using capital as well as income to support retirement. But I find many of my clients, once they've built a pension pot, they don't want to let it go, they don't like the number going down. 

Tom McPhail: So, what you’ve just described there is you've got to sell capital – you've got to make a choice about which assets am I going to sell, which ones am I going to turn into income? I've got to keep rebalancing the portfolio. None of that's simple, is it? 

Sam Secomb: No, it's not simple. But I don't think you can do it too mechanised. Again, you've got to look at where the market is to decide whether it's a capital or income type sell down that you're going to be doing. Those centralised investment propositions that leaned heavily into income generating assets really took a beating in the recent debacle with the bond market, didn't they? And these safe assets suddenly showed their teeth. And I've been through that before when bond markets take a hit and nobody sees it coming because we all, theoretically, lean into bonds for income and don't expect them to do anything like equities do? And all of a sudden, they do and everything goes wrong. 

Paul Squirrell: So, it's back to the importance of the review, isn't it? Reviewing the portfolio – you're seeing what's done well and equalising assets, that's the time to think about securing levels of income? 

Toby Bentley: Yes, I was going to just speak to one of your earlier point, Sam. Not wanting to see the pot go down, again, goes exactly back to that psychology of shifting from accumulation to decumulation and as part of that, what you've got to really think about is not only what you're going to spend your money on and how much, but how are you going to spend your money, what order of assets are you going to sell? You mentioned it earlier, Tom or Sam, do we keep the pension to last? What implications does that have? Do you have rental income? Do you have State Pension income? All of these considerations fall into the order that you spend as well. 

Tom McPhail: So, what's the role of guaranteed income in that because annuities, for example, went way out of fashion through the mid-2010s because of interest rates and everyone decided annuities were poor a deal. And we talked a bit about how the economic environment has not been benign for annuities as such. But people increasingly want security in retirement, they want some certainty. And maybe there's an argument for locking in some income to cover the essential expenditure stuff. So how do you balance that lot off? 

Toby Bentley: The essential expenditure is the part I like of a guaranteed element of a plan. If you think of the pros and cons of guaranteed income, you can guarantee that you're not going to run out of money at the end of the month for the bills. Brilliant. It doesn't often give you the flexibility you might want to go travelling more or to have longer-term care needs, but it does definitely play a part, which is why potentially part-annuitisation fits quite nicely for some clients. 

Tom McPhail: Okay, do you lock that in at the point of retirement or do you do progressive transition to annuities on the way through? Do you have a preference on that kind of thing? 

Toby Bentley: For me, fundamentally, it's going to be down to the individual client. I think locking in an element at the start, particularly if annuity rates look quite attractive, then you can lock in some when you know what you're getting essentially. 

Sam Secomb: That’s the stage when they'll be expensive, isn't it, when clients are at the youngest point of their retirement? 

Toby Bentley: Yes. 

Paul Squirrell: Is there an argument that follows on from your point, Tom, that says that actually by securing that “heat and eat” , for want of a better term, level of income actually gives you more flexibility in terms of how you can spend your money in retirement?

Tom McPhail: Taking more risk with the rest? Yes. And I'm really interested in we're now seeing products coming out that allow you to buy an annuity-type income that sits within a drawdown plan. So, you kind of get the best of both worlds. And I think that's a really interesting development going forward. I think we'll see more of that kind of thing coming through because it kind of gives the client the best of both worlds. They've got certainty of income, but they haven't actually had to lock that capital into one annuity contract at the point of retirement. 

Sam Secomb: Do we think that those products are coming to market because the annuity market is resuscitated a bit? 

Tom McPhail: That’s a really interesting question. I think perhaps the interest rate environment is certainly more benign for that kind of thing. I know that kind of product development has been in train for, certainly predates the current change in the interest rate environment. So, I think it's perhaps a happy coincidence.

Sam Secomb: The pension freedoms came in to rescue us from a long poor annuity environment, didn't they? And now annuities have resuscitated a little bit. I know that for the first time in years, I annuitised for some clients. 

Tom McPhail: How did it feel? 

Sam Secomb: Odd, you know. 

Paul Squirrell: Did you have to explain to the younger members of the team what they were? 

Sam Secomb: Absolutely! The point is that it's come back, hasn't it, as an option because the numbers are stacking up now, especially as the client matures or they have a health incident. So, they have a health incident and all of a sudden security becomes paramount.

Tom McPhail: And the rate goes up!

Sam Secomb: The rate goes up, so you can secure the future. 

Tom McPhail: That psychological desire for certainty in retirement – I have a lower tolerance and capacity for loss and uncertainty, and bad things happening suddenly, I want more certainty – that psychological need for people in retirement has always been there, hasn't it? 

Toby Bentley: Yes, definitely. The numbers – I think it is three times more people are in drawdown pensions rather than annuities these days. So, you're absolutely right, Tom. But I think the shift at the moment is still those with pots, that the drawdown pots that can run out. 

Tom McPhail: You to be fair, partly what you guys do is give them that reassurance, give them that certainty. So, we haven't bought a product that does it, but you provide a service that gives them that annual reassurance. I'm on the case, I'm looking after you, come back next year and I’ll keep an eye on things. And that's what you sell, isn't it? 

Toby Bentley: Yes. And one thing that's interesting is, are we talking more about guaranteed incomes now because of what's going on in markets, what's going on in the world? We’re naturally more inclined to be fearful because markets have had a much tougher year or so than we're used to for the last decade. So, is there a psychological element where actually part of the adviser's job is to coach people through these tougher periods and stick to the fundamental long-term plans? 

Sam Secomb: That’s availability bias, isn't it? Because it's all over the news. The planning we do looks back 20 years and looks forward 20 years. So, we get our data from a 20-year data set.

Paul Squirrell: There's a bit of a dichotomy going on here because, on one hand, it's spend the pension last, it's succession planning, but annuitisation goes against that and to the point where, I think you mentioned, Toby, that people don't like seeing assets going down. So, is it a temporary thing? Do we think that annuities are a temporary thing or are they back to stay? 

Tom McPhail: I think certainty will never go out of fashion and whether it's a collective defined contribution accumulation vehicle or a DB pension, certainty in retirement is always going to be desirable, I think, as people get into their 70s and so on. So, I think there's that. I'd liken what we've had over the last eight years to – I apologise for this analogy, but I think it kind of works – if you can imagine someone who's not looking after their health well, whose cholesterol is building up, who's taking risks with their life but not realising they're taking risks. That's kind of where we've been for the last few years with the investment environment. And things are kind of snapped back a bit over the last year. And some of those risks are now coming home to roost. So, suddenly the guy has a heart attack in his 50s – it was always coming, it was just we were just waiting for those risks to manifest themselves. And I think we need to be cognisant of the fact that we have had quite a benign environment for the last eight years and that we shouldn't let that sort of cloud our expectations. Your point, Sam, that we need to be conscious of the future being different. 

Sam Secomb: But the whole idea of including annuities for certainty and that being anti-succession planning, I think the opposite. I think if you can nail security during somebody's lifetime, you can identify what’s spare – as long as you've got a contingency plan… 

Tom McPhail: You're not going to get all of it, got to park this bit…

Paul Squirrell: And I suppose the other consideration with, if you don't annuitize, we're talking about all of the things we've talked about so far – sustainable rates and what levels of income you can draw – is one thing when you're advising somebody who's at 55 or 60, but you could be advising people throughout their lifetime, and it is quite complex stuff. So, do we need to be conscious that there's a vulnerable client issue coming into play and how do we identify that? 

Sam Secomb: I do think that we enjoy working with clients throughout their lifetime. That's one of the pleasures of being a financial planner. So, inevitably, those clients will have health issues. I have clients aged 30 or 40 who are vulnerable at some point because of something that's happening to them. And you know that as an adviser you have to moderate the way you're communicating with a client because they don't have the bandwidth sometimes to deal with it and other times they're there and they're present and they're excited. But definitely, as people have health issues and age, you might want to start including the next generation in some of the planning because if they are going to inherit the consequences of the work that you're doing and I think if your client is open to that idea – because I have clients who are not open to that idea – then include the next generation in the planning and I think you help the client with the decision making. They get another perspective as well. And it helps the business because as that wealth transitions, if you've built a relationship with the next generation as well, then you're more likely to retain them as clients going forward. So vulnerable clients, yes, I think we must expect to meet people in vulnerable stages of their lives and sometimes that turns out to be quite permanent. 

Paul Squirrell: And presumably the next generation are likely to be those people with the power of attorney, etc., as well?
Toby Bentley:  Exactly. I think to Sam's point, client retention is one of the key aspects of growing a client base as an adviser and having chaperones, having client family members sit in with vulnerable clients, it's an obvious safeguard for vulnerable client care. But also, at the same time, it allows you to speak to family members who the wealth will be transitioning to. I think there's a fairly shocking stat that about 70% of clients switch adviser once their parents pass away and leave them money, which number one, speaks to the fact that obviously they're probably not engaged with their parents’ adviser in the first place. And then secondly, shows you what can be done meeting younger generations. We're about to see one of the biggest shifts in wealth ever… 

Sam Secomb: Billions, trillions moving. And, you know, Woman's Wealth knows about these statistics because that wealth is shifting to women as well, because the baby boomer men are dying and leaving wealth to their widows. So, by 2025, actually, just around the corner – they reckon that more women will be in control of wealth than men – the greater amount of wealth will be in the hands of women. Do women think differently to men around finance? Yes, they do. 

Paul Squirrell: While we're on the subject of succession planning, we're in a state where there's been recent budget announcements – it’ll be good to get your thoughts on those as well, changes to the lifetime allowance, but there's also the prospect of a change of government in the next few years. How is that playing into conversations with your clients as well in terms of succession planning? Do they think there'll be changes in the generosity in succession planning?

Toby Bentley: Yes, changing government, the obvious point, which I'm sure we'll get to, is lifetime allowance changes, which who knows if they're going to stick around forever. But yes, transition in wealth, a shift in government. The big roadblock that all advisers face is how do you plan for something that isn't guaranteed? If there is a shift in government, do we know what the policies will be? Is it possible to know ahead of time? And therefore, I think being adaptable as an adviser is a key a quality as even knowing what the plans will be just because you can't know what's going to happen. You can obviously mitigate risks by having safeguards in place but, ultimately, if we don't know what's going to happen, it's very, very hard to plan for. 

Sam Secomb: I think we have an obligation to maximise the tax system as we know it and that dictates quite a lot of the planning we do. But I think it would be also quite foolish to get overexcited about the idea that you're going to be able to move all this money into pensions and that you're going to be able to transition it inheritance tax free to the next generation. I think that seems like a bit of an obviously over generous system at the moment. 

Tom McPhail: Yes, absolutely agree with that. And if you look at whether the next government is a coalition, or Conservative or Labour, you look at where the money is going to come from. They've maxed out on the government borrowing – they can always borrow more, but it's looking increasingly unattractive for them. Taxation is already at quite a high level, so there's basically two big stores of wealth the next government can go to. It's either your pensions or your houses – that's where the pots of money are. I think there are therefore inevitable risks to clients’ wealth where it's stored in either of those two pots. I think we're going to see governments coming to look at those. 

I think the situation we've got at the moment with the death benefits on pensions is bonkers. It makes no sense that the government gives you tax relief to build up a pot that gives you tax free growth. I think you made the point off-air earlier, Sam, that the pension commencement lump sum is going to erode over time. Not only is it never going to go back up again from here, but it will probably disappear over time. And I absolutely agree with you about that. But you're getting all these tax breaks to build a pot up. And then the government says, I tell you what, you can just pass it on largely tax free on death. And that makes no sense. So, to me, that is an obvious target for a future government when the planets align and they feel they can come and raid that. So, I think that's something to plan for. 

And we talked briefly about the lifetime allowance. On that point, I agree with you. We don't know what's going to happen next. From a planning point of view, I would work with what is in front of us. I think actually it's going to be quite hard for Labour to unwind what the Conservatives announced in the last Budget. They may do. But I also think, if they do, we'll get a repeat of 2006 when the last Labour government introduced a lifetime allowance in the first place. To me it’s inconceivable that it would reintroduce the lifetime allowance and not build in some protections for people who've chosen to fund their pensions over this two-year period in between. 

Toby Bentley: Yes. So, where does that tax come from then? From pensions and property? Property, in particular, it's much harder to try and tax people on because you’ll get somebody with no income and a massive property. You can't tax them whilst they're living. So, do they introduce taxes on death or do they focus on pensions because it's a sort of an easier ‘go to’? I don't know. 

Tom McPhail: I can see both happening. So, I think the death benefits on pensions – there is room to tighten those up without too much pushback. I think they could do that. I think they'd get more pushback on taxing property wealth. I think it's very hard to tax in people's lifetimes because, as you said, you've got that classic case study of the asset-rich, income-poor granny and if they come along and say, well, we're going to tax you on the wealth of your property in your lifetime, she's like, how do I pay for that? I've got no money. I can't live as it is. So, well, okay, we will wait until you die and then we will come and take a slice of that off you. And, at the moment, we've actually got an inheritance tax system that creates a slightly generous exemption for your housing wealth. There's an additional IHT allowance there. 

So, I could see future governments choosing to target that. And if it was a Labour government, they would deliberately target the wealthier people and say, look, you've got more than enough money, we're going to let you pass some of it onto your kids, but we'll just scoop a little bit out on the way past. And maybe, if you need long-term care in your later life, that hugely expensive last couple of years of your life when you can rip through £50,000 odd a year or more with care costs, that's a huge burden on the NHS. Maybe we'll take a little bit of that after the event. And I know Theresa May got kicked for that in 2017 with her dementia tax manifesto, but I could see that coming back into play as well. 

Paul Squirrell: Is there anything we can do to plan around this? We haven't talked about this today, but equity release comes into play with creating debts against estates, etc. 

Tom McPhail: I wouldn't necessarily do that as a deliberate inheritance tax planning strategy, but you can do that for wealthy people and say, look, I will deliberately reduce the value of the estate and, as you said, Sam, leave the pension to one side because that gets more benign treatment on death. I do think equity release is under-utilised at the moment. Average property wealth is around £250,000. We've got a £48 billion a year retirement income gap at the moment. There's a lot of people who don't have enough income to live on in retirement. Many of them are typically not being served by financial advisers. They sit below the kind of clientele that you guys typically would work with. But there are a lot of people who could benefit from a little bit more income from their property wealth than they're currently using and I think equity release has a role to play.

Paul Squirrell: But it's not very easy for these people to do it without the help of advisers.

Sam Secomb: I think the market for equity release is nascent still, really. The products are better than they were, but they're still expensive and clients do not understand compound interest. They never have. It's a big ask. We know that from helping them generate wealth so they don't understand the impact of compounding interest against their wealth when it's building up as a debt. And I think that's a really hard thing for them to get their head around without advice. So, they end up going into something and not really getting the full potential of the risk – the contract, the cost of the contract they've entered into. 

Tom McPhail: I think you're doing a disservice to the equity release advisers there. So, I agree with you about people very often don't fully understand how compound interest works, but there are retirement interest-only mortgages as well. I think my own experience of the equity release market is that advisers are pretty good at putting options in front of clients and saying, look, if you want capital now maybe to improve your house or to provide you with the income you need, you can service that debt. I know most people don't, but there are options there. And if you haven't got enough money to live on now and you've got that housing asset that's just sitting there that's providing you with a roof over your head, but is a dormant asset in terms of income or capital, then I think, as a sector, we should be making more use of that than we do. 

Sam Secomb: I love the idea that advisers are doing their best to help clients understand the risk, but the truth is, it’s a commission environment. If they don't make the sale, they don't get paid. And talking about asking clients to understand a very, very tough concept, which we know is hard to educate them on when we're talking about growing assets, let alone when we're talking about growing debt against the estate. So, I think the regulator needs to be very careful with this environment. I think we've got a complex subject. We've got a commission-driven environment and expensive products still and I think that has the potential to be disastrous for clients. 

Tom McPhail: I'm really interested to see how the FCA’s review of retirement income advice plays out this year and the fact that it's looking at how advice is delivered in the retirement space and it's bringing in equity release as well, and looking at those because it currently regulates equity release in a mortgage silo. So, it's kind of off there on one side. It's not treated as wealth in the same way that stuff that you guys typically deal with is wealth. So, I'm really interested in how they bring those together and what that review tells us about what the FCA thinks good looks like going forward from here. 

Paul Squirrell: Whilst we're not in the business of speculating, that's a good point, Tom, because we have got that thematic review. I think it was January it was released, wasn't it? Have we any thoughts about what areas they may be targeting? Obviously, this was originally designed because of the increased cost of living, etc. 

Tom McPhail: We've got some big stuff coming down the tracks from the FCA. Most immediately, obviously there's the Consumer Duty that lands in a couple of months’ time. Hopefully, everybody's baked that into their business plans already. But the two big reviews around retirement income advice and the advice guidance boundary thematic review stuff. Because the problem is at the moment, only around 10% of the population gets advice – people moving into retirement, not enough people are getting either advice or guidance. That is a problem. 

And if you look at the FCA data on retirement incomes, up to pots of £250,000 going into drawdown, the commonest rate of income withdrawal is over 8% a year. Okay, whether you're talking about 3%, 3.8% or 4%, Toby, 8% has got an alarm bell going off at that point, right? And that's the most common rate of income withdrawal for all pots up to £250,000. Okay, that's quite alarming. That's my point about we're baking in problems further down the line. They're going to come home to roost. So, the FCA has to fix that. It has to find a way to make it easier for people who currently don't get financial advice – or don't even get guidance in a lot of places – to make more informed decisions, even if it's not the full fat kind of financial advice that you guys give your clients today. 

Toby Bentley: And four out of five advisers say that giving retirement advice is their main area of expertise. So, if it's that important, then clearly trying to open it up to as many clients as possible is the key for any financial adviser. 

Paul Squirrell: Yes, it sounds like there's quite a lot to unpick there. We've covered a lot of ground today, so we've got about five minutes or so left. So, what would be really useful, if you don't mind, if I just ask you all just to spend a couple of minutes, what are your key takeaways if you had to try and surmise what we've covered today for advisers and for clients? 

Tom McPhail: I think, as an industry, we're in a much better place than we have been in the past. I think some of the big reforms we've seen coming through from the government and from the FCA have created a much better industry than was the case 10 or 20 years ago. So, that's great. And I think, mostly, the services and the products that financial advisers deliver to their customers are pretty good, right? So, that's great. 

My worry is that I see a lot more disruption coming down the track. We've talked about the fact that we've got a general election coming within the next 18 months. There are some big political pressures there. I think there's a lot of unfinished business politically with savings, wealth and pensions and whether it's the death taxes or the tax breaks that are available on pensions, we are going to get more interference from governments on that. I can guarantee you that. And, at the same time, as we've just talked about, we know there's more disruption coming from the FCA, we've got those big thematic reviews coming through over the next year or so, and it will take a while to play through. But, from both the government and the regulator, I think we've got a lot more disruption to come. So, I guess my key takeaway would be whatever plans you're putting in place, they have to be sufficiently agile, sufficiently adaptable to take account of these further changes to the rules, the moving of the goalposts that we are going to see over the next couple of years as these big policy initiatives play through. 

Paul Squirrell: So, a case of hedging your bets? A theme that's come up a little bit today. 

Tom McPhail: And also, having that conversation with your clients, making them aware – I'm telling you what the world looks like today, I'm also telling you the world will look different tomorrow. And that needs to be recognised now so that when the rules change a year from now, you don't get the client wagging their fingers saying, well, you didn't tell me this was going to happen. 

Paul Squirrell: But to the point already made, it's a very difficult thing, Sam, isn't it, to make recommendations – well, it's impossible – you can't make a recommendation on the basis of legislation that may or may not happen?

Sam Secomb: You can't. I think part of our role when we get to work with clients is to help them view their life through a lens they're not used to looking at it through. So, this is the long term. We all kind of live our lives on a daily basis. We enjoy what we enjoy today and we can overweight that enormously. And our job is to try and get clients to look through a much longer-term lens and plan ahead and treat their assets in fairly significantly large baskets. What are we going to spend first? What are we keeping to last? What are we passing on to the kids? It's changing the lens through which they generally view their personal finance and well-being to this much longer-term view. And I think that is the role of a financial planner at heart, really. 

Paul Squirrell: It's interesting – it was a point that you picked up on earlier, Tom – because we talk a lot about financial planning in terms of doing the right thing with the tax planning and the investments, but there seems to be a huge role in decumulation that you play almost as like, dare I say, a counselling role and counselling clients through retirement. 

Toby Bentley: Yes, it's what differentiates us between robo advisers, right? It's why, for all of the metrics we can put on retirement, all of the perfect cashflow modelling, withdrawal rates and percentages, there's got to be an element of flexibility within all of that planning based on the individual, what they think retirement looks like for them, what assets they've got, what they want to withdraw, when and how that suits their lives. So, I think that would be my key takeaway, is that, within reason, we want to set some guardrails around what's sustainable – 8%, you mentioned Tom, obviously we've got to be optimistic – but having guardrails is very, very important. But within that, there's got to be some flexibility. 

Paul Squirrell: I think we touched on this earlier, Toby. Is there a danger, and 8% obviously isn't the answer – well it is if you know you're not going to live very long – but is there a danger that we do go the other way too far, too conservative? 

Toby Bentley: Yes, definitely. What you don't want to do is get through retirement having spent no money and not enjoyed it and you're the richest person in the graveyard, for example. But at the same time, I think it's all on balance. Because, again, the risk of leaving more money than running out is the preferable one. So, it's all within balance. 

Sam Secomb: And human nature does overweight current enjoyment over long-term security. So, we are naturally inclined to do it the wrong way round, aren't we? So, helping clients and helping ourselves not to make those mistakes, it's a huge part of the work, I think.

Paul Squirrell: That's great. Thank you all for your contributions today. Again, thank you to our panellists, thank you everyone for watching. Hopefully, there are some ideas that have come out today to help you with framing your conversations with your clients who are nearing retirement. 
If you want further information on planning for retirement and discussion papers, please do look at the retirement income section of our “technical resources” hub on our website. And lastly, if you can, please do complete the short survey that follows this webinar, because that does help us with future events. Thank you all for watching and bye for now.