Advisers that fail to grasp the importance of centralised retirement propositions risk the loss of clients that are at or in retirement in the next decade, as solutions in retirement become increasingly mainstream, Seven Investment Management (7IM) has said.
The combination of pensions freedoms, very low annuity rates and shifting demographic trends have created a growing need for solutions in retirement for many advisers’ clients.
However, the use of centralised retirement propositions is yet to become mainstream, and Verona Kenny, head of intermediary at 7IM, said the trend will become as commonplace as centralised investment propositions have over the last decade.
“The world has moved on and the end game for many advisers and their clients have been pushed out substantially,” Kenny said.
“For advisers this is both a massive opportunity but also a significant risk. Once clients move into decumulation their pots start to erode as income is withdrawn, and there is an increasing risk of running out of money.”
7IM carried out research modelling returns for two investors who each saved an average of around £7,500 a year from the age of 30 to 60 (starting with £500 and increasing by £500 in each year of employment), retiring with an annual pension of £22,000 a year.
One saver invested in a moderately cautious portfolio targeting a return of 4% a year; the other took a step up the risk ladder, investing in a balanced portfolio targeting a return of 5% a year.
At retirement the first had a portfolio worth around £375,000 and the second had £425,000. The first ran out of money at 86, having withdrawn £22,000 per year. The balanced investor still had around £275,000 left at this point, demonstrating how a very small increase in investment risk can make a remarkable difference to outcomes when pension pots are at their greatest, in retirement, and the effects of compounding are at their most potent.
Kenny said the opportunity for advisers to both assist clients in this increasingly complex area, and build further longevity into their own businesses, was huge.
“Advisers are best positioned to help clients tackle and manage their retirement in the same way they have helped them save and prepare for it,” Kenny said.
“Arguably, it is an even more crucial service to offer clients. This is because once in retirement, the danger is that pots can be eroded very swiftly as income is withdrawn, with the fear of actually running out of money in retirement at the forefront of clients’ minds.”