The Value and Role of Financial Advice in Retirement Planning

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With an aging population, the topics of retirement and pensions are rarely out of the limelight. A combination of the demise of final salary pension schemes and a continued tightening of state benefits has led to a new retirement era contrasting the one enjoyed by previous generations.

Pensions today look very different to how they did half a century ago. With few exceptions, men retired at 65 and women at 60. The state pension commenced at the same time and there was no option to defer payment. Company pensions were also mostly final salary schemes, whereas today, there isn’t a single FTSE 100 company providing a guaranteed pension based on final salary that remains open to new entrants and the statutory pension age has been scrapped altogether.

Whilst auto-enrolment and new pension freedoms have gone someway to improving the outlook, the complexity of the various pension options now available has led to many not knowing which route to follow.

New research published by Sanlam UK, which compared the attitudes of 1000 people who have retired in the last 5 years with 1000 over 60’s approaching retirement, revealed that 40% of those nearing retirement said they felt unprepared for retirement, with 16% saying they had put off doing anything about it because it “all seems too confusing”.

Elliot Silk, Sanlam UK, comments: “Retirement is changing, and our research shows how quickly that change is occurring. The population is aging, and in future years ‘retirement’ could be 30 years or more. Planning for this retirement can only happen once….If we don’t do more to help people understand the options available to them, both when preparing for retirement years and in retirement itself, the results could be catastrophic.”

To encourage savers to seek the advice of an adviser, the Financial Advice Market review has proposed that the government allows savers to access money from their pension pots in order to pay for financial advice and the idea, should it be officially introduced, would appear to pay off – research suggests that a quarter of non-retired over 60s become more pro-active in planning for retirement after speaking to an adviser.

Vanguard Asset Management commissioned research to show the difference between the return that investors might achieve with an adviser versus the return they might have achieved on their own. The project has shown that financial advisers typically add around 3% a year to their clients’ investment returns, demonstrating that there is real value to be gained by seeking professional advice. There are seven key components Adviser’s Alpha uses to help calculate this added value. These include:

Asset allocation – The setting of long-term allocations between equities, bonds, cash and other asset classes is one of the most important drives of long-term performance and volatility. An adviser can help clients to assess the performance of their investment portfolio in times of uncertainty, reassuring them that a long-term view is the best solution, when a client may have been inclined to switch their portfolio to lower risk alternatives with lower gains had they been managing their investments themselves.

Rebalancing – As different assets perform differently, it can be difficult to know which areas to address as markets change. An adviser can add value in helping clients to rebalance their portfolio to suit market performance, control risk and keep long-term goals on target.

Cost-effective implementation – Every pound paid in charges to an adviser is a pound of a client’s potential returns so choosing the most cost-effective fund can help to reap rewards over the long-term. While a client may opt for an all-bond portfolio based on lower average charges, an adviser can help to deliver a blend of equity and bond-based investments that can help deliver better returns over time but still remain cost-effective.

Behavioural coaching – Whilst many investors understand the importance of remaining disciplined in times of uncertainty, many fail to stay calm in volatile or turbulent markets. During these rare, but not unheard of, circumstances, advisers can coach investors to stay focused on their original plan, helping them to avoid pitfalls such as chasing performance or trying to time the markets.

Tax allowances – The benefits of investing tax-efficiently will compound over time and will be driven by the right allocation of investments in both tax-efficient and tax-advantaged wrappers. An adviser can help clients to allocate the right percentage of their savings across these different asset classes in order to maximise returns.

Spending strategy – Following new legislation on access to pension funds, there are an increased number of financial options available to investors. Advisers can add significant value by ensuring that post-retirement spending is undertaken as tax-efficiently as possible, at the same time as providing clients with the long-term income they need to live the lifestyle they have been saving for.

Total return versus income – There are several options for clients whose portfolio income falls short of their spending plans, including the use of a total-return approach. An adviser can help clients to focus on both income and capital appreciation, offering greater flexibility from an asset location and tax efficiency perspective and controlling risk by ensuring maximum diversification.

If you would like to speak to an adviser about your retirement options, please get in touch.

Sources: https://www.sanlam.co.uk/Assets/PDFs/Literature/1425-Which-way-forward-report.aspx
https://www.vanguard.co.uk/adviser/adv/home

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