When do you Start Planning your Retirement Decisions?

We got a call recently from a client of another financial advice firm, wanting to talk about her upcoming retirement. It appeared she was second-guessing the advice that she was being given and wanted a second opinion.

Her issue was that her existing advisor seemed to be strongly encouraging her (to put it mildly!) down one particular path in relation to the structure of her post-retirement money. This also seemed to be completed disconnected with everything that had gone before. She was being bombarded with new information about new structures and investments to consider, and realised her decision period was short. She was in somewhat of a spin and rightly couldn’t understand how the passing of this milestone date heralded such a volte face in relation to her current investment approach.

This matters, and she was right to be concerned.

We believe that all investors should consider and have an understanding of their retirement options well before they actually reach their proposed retirement date. They ideally should have an idea of how they plan to deal with the choices that they are going to have to make between say, buying an Annuity compared to an Approved Retirement Fund. These decisions should be considered at least several years before they retire and ideally at least 5 years before normal retirement date.

The reason for this is that the asset allocation decision for their pre-retirement fund should reflect the likely decisions that are going to be made at retirement. There needs to be a long-term plan in place, this is not simply a transaction to be implemented.

Consider Some Examples

If an investor intends to take 25% tax free cash and purchase an annuity, then their pre- retirement investment strategy should reflect this with a steady move to cash as retirement approaches, until 100% of their fund is in cash at the retirement date.

Whereas, for an investor intending to exercise the Approved Retirement Fund (ARF) option, only 25% of the pension fund needs to be held in cash at the point of retirement. As they may still have a 30+ year investment time horizon ahead of them, the balance should remain invested in a long-term investment strategy appropriate for the investor’s need, willingness and ability to take investment risk.

Advisors who are talking to clients about their retirement options have a duty to consider all the options that are available before making a recommendation. This could include options which do not pay the advisor any commission, such as NOT taking a tax-free lump sum from a Defined Benefit Pension and taking the higher taxable income instead. The most suitable option in any particular circumstance must be identified by taking into consideration all of a particular client’s financial priorities, followed by a full and unbiased discussion about the risks which would apply to each alternative.

For this lady who approached us for a second opinion, unfortunately it was all a bit late. The investment approach of recent years bore little suitability to the post-retirement requirements of this client. This was not in her financial interest and the advisor lost out too, as the client’s trust was terminally lost.

The bottom line is, how you will take your retirement benefits should be planned years in advance. It may be a transaction on your retirement date, or instead your retirement date may be a single milestone on a total 40-50 year investment journey. That conversation with an advisor needs to start now.

At Everlake, we help retirees identify the life they want to live in retirement and then develop a plan to help you achieve that life. We focus on how you want to live in retirement and the quality of that life, not just on the size of your pension pot.