How Covid-19 rebooted retirement
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Looking back on your experience of 2020, what did you miss the most in the pandemic — and what did it make you reassess?
Financial planners believe the answers to these questions could help people in their 50s and 60s do a better job of mapping out their retirement goals.
“Money aside, a lot of the work we’re trying to do is finding out what really matters to people,” says David Hearne, chartered financial planner at Satis Wealth.
As a result, some of his clients are in the process of moving across the country to be nearer to their children or grandchildren. Others want to know if they can afford to take early retirement, having realised they do not miss the office, and others still are contemplating a career change — not all of them by choice.
Mr Hearne believes that starting a conversation about lockdown is a “less fluffy way” of identifying financial goals to work towards in retirement than the financial planner’s traditional opening gambit of ‘What do you really want to get out of life?’ He once had a client who responded: “Er . . . aren’t we here to talk about pensions?”
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For many, the 2020 experience was a taster of what retirement could be like — as well as providing a jarring reminder to people to put their financial affairs in order.
Remote working and freedom from the daily commute has unlocked more leisure time, as well as raising the possibility of moving further away from the workplace — taking some over-50s a step closer to the kind of life they want to lead in retirement.
On the flip side, rising redundancies mean some may be bounced into an early retirement they neither wanted nor could afford.
And then there’s the impact on pensions and investments to consider. After the initial shock of the pandemic, those on the glide path to retirement are more mindful about their financial health — prompting many to seek professional financial advice.
Plan for the worst, hope for the best
Wealth managers say the pandemic has focused clients’ minds on the income they will need in retirement.
“Now that they’ve experienced what sitting at home and not travelling anywhere is like, there are some who are eager to make sure they have enough money in retirement to go out and enjoy themselves as much as they possibly can,” says Michael Martin, head of the private client team at Seven Investment Management (7IM).
Their financial plans are being tweaked to provide for more spending in the early years of “active retirement” — but lockdowns have also made it much easier to predict what income requirements in the later stages of “passive retirement” could be like.
“Before Covid, you couldn’t really ask clients to stay at home for a year to see how much less they might spend,” Mr Martin adds. “Yet by the time you’re in your 80s, that is pretty much what you’re doing — there’s no commute, not many holidays abroad and your day-to-day living expenses vastly decrease.”
The pandemic has thus proved a useful test of how far your money might stretch. Many retired 7IM clients have found that the combination of income from their final salary and state pensions has been more than enough to live on under lockdown, giving them greater confidence to spend more or gift more in the “active” phase.
However, those yet to retire are less likely to have the luxury of a gold-plated pension and will have to manage their investments much more intensively in retirement.
Despite huge market volatility, most investors will have ended 2020 slightly up on a year ago. Advisers sense things would feel very different if asset values were still depressed — and clients approaching retirement are especially fearful of another dip.
“A lot of financial planners are trying to position themselves as financial coaches or even financial architects to stimulate a debate with clients,” says Keith Richards, chief executive of the Personal Finance Society, referring to advisers who offer to help clients “design and build” a retirement plan.
As well as taking stock of what they have, clients are seeking advice about de-risking, diversifying investments and dealing with volatility.
“Traditionally, your relationship with an independent financial adviser ended at retirement — you’d achieve all of your objectives and take out an annuity,” Mr Richards says. “Now the opposite happens, and clients continue to see financial planners throughout their retirement years.”
This is partly due to the rise in pensions drawdown, where investments are actively managed during retirement to generate income. The immediate impact of the pandemic on capital values and dividend payments has shown people they need to build greater resilience into their plans — and ensure they are properly diversified.
Based on anecdotal reports from PFS members, Mr Richards says 2020 has been “the busiest year ever” for many financial planning firms, as new and existing clients seek reassurance that their retirement plans are on track.
“Cash flow modelling is very important for people — they want to see graphics and visualisations to help them set goals and aspirations for their retirement years, ensure they have enough cash for key events and that their income requirements can be met,” he says.
As well as managing volatility, clients also require help with sequencing the order in which they take cash from various assets, such as pensions, Isas, investments, equity release and buy-to-let properties.
A bump in the road
The pandemic has triggered plenty of specific financial problems — redundancy being the most obvious.
Mr Richards says many advisory firms are dealing with rising numbers of clients in their 50s and 60s who have recently been made redundant. “Often, redundancy and being furloughed are a catalyst for people to consider early retirement,” he says.
“Members tell us that they’re dealing with clients who have been made redundant from big firms like British Airways, Rolls-Royce and Jaguar Land Rover, many of whom want to explore defined benefit pension transfers.”
However, he says that fewer than one-third of financial advisers are now prepared to advise on final salary pension transfers, after fears of future mis-selling caused the cost of professional indemnity insurance to soar.
Pensions transfer advice, even if you can find it, is very expensive. On the flip side, the market volatility of 2020 has convinced plenty of clients that a steady, inflation-linked income for life is a more desirable commodity than a lump sum today.
“There are a lot of people who don’t realise how valuable their defined benefit pensions are — both in the sense of the giddy heights transfer values have reached, but also the security of an income for life,” Mr Hearne says.
The same goes for appreciating the value of salaried full-time employment versus being self-employed or running your own business.
“No matter what industry you’re in, everyone has been slightly worried about losing their job,” says 7IM’s Mr Martin. Many have been forced to contemplate how they would cope if they were made redundant.
The bedrock of regular income from a final salary pension can allow investors to take higher levels of risk with other assets. However, the reverse is true for younger clients with defined contribution pensions, who face more complex choices.
“The typical boomer had children younger, bought houses earlier and then benefited from massive house price appreciation,” Mr Hearne says. “By the time they hit their peak earnings in their 50s, their liabilities were much lower and they had huge excess income to repair any cracks in their retirement plans.”
Today, he says, couples in their 50s could still have school-aged children and big mortgages, constraining their ability to cure any problems, and making them much less financially resilient should one of them lose their job.
“Lots of people in their 40s and 50s want to overpay their mortgage, but the experience of the pandemic shows how important it is to build a sufficient emergency fund first,” says Mr Hearne. “If you’re made redundant, you won’t be able to borrow that money back by remortgaging your property as you’ll no longer have a job.”
Capital gains tax liability is the current preoccupation of many wealth managers as the government conducts a review into CGT, amid heightened expectations that wealth taxes will be used to pay for the pandemic.
To help him weigh the options for his clients, Mr Martin has calculated the individual liability each might face.
“The fact that CGT is only charged at 20 per cent on stocks and shares makes it a pretty good tax,” he says. Clients who hold significant amounts of shares outside pensions and Isas are contemplating whether to sell and pay the tax now. “The CGT rate might not go up, but I think we can safely say it will never go lower than 20 per cent,” he adds.
As the cohort that benefited from the 2015 pension freedoms reforms grows older, advisers say a rising numbers of clients who are now in drawdown plan to buy an annuity much later in life.
There is a greater desire for certainty of income in the “passive” phase of retirement — and buying an annuity in your late 70s or 80s means the rates could also be considerably better.
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“People in the decumulation phase of retirement [where they are running down their savings] may get to a point where they get certain ailments and illnesses which ironically enable them to buy a much better income via an enhanced annuity,” Mr Richards adds.
Planning for what will happen at the end of your life is another — perhaps all too obvious — side effect of the pandemic.
There was a three-fold increase in the number of people who made a will last year compared with 2019, according to Farewill, the UK’s biggest digital will provider.
Advisers stress that wills are just one part of end-of-life planning. Clients have also been keen to set up a lasting power of attorney, check their life cover, and, increasingly, have plans ready for passing down wealth to the next generation.
In the short term, however, wealthy retirees have a different problem to live with. “Most of my clients absolutely cannot wait to start spending money again,” says Mr Martin.
As well as booking holidays, some are contemplating buying second homes and holiday homes abroad, figuring these could present less Covid risk than staying in a hotel.
There is, he says, “definitely a feeling of carpe diem” among older, wealthy retirees: “I survived Covid, and now I want to enjoy my money and have some fun.”
How the retirement sequence is evolving
Covid disruption aside, what are the long-term trends that will drive how we spend our time — and money — in retirement?
It is safe to say the golden age of retirement is behind us. Trajectory, a consultancy, mapped the likely “retirement journeys” of people in the UK by 2035, by which time there are forecast to be 20.9m over-60s, compared with 16.6m today.
By that time, the proportion who are “financially mature” consumers — whose wealth has been bolstered by final salary pensions, exponential house price growth, and no compulsory retirement from work — will shrink. They make up one-fifth of the over-60s today, but tomorrow’s retirees are likely to face greater financial strain.
By 2035, Trajectory predicts the fastest growing cohort will be what it terms “late financial bloomers”.
“Financial maturity is delayed as people do things much later in life — get married later, have children later, achieve home ownership later and take out a mortgage for longer,” says Paul Flatters, Trajectory chief executive.
This all has an impact on retirement saving. The average renter will have spent £53,000 on rental costs by the age of 30, according to the Resolution Foundation, and 40-year mortgages are fast becoming the norm.
The second fastest-growing group that Trajectory identified are “complex families, with complex finances” driven by rising divorce rates and changing family formations. As well as the impact on splitting assets such as pensions and property, “advisers need to be aware of how multiple marriages and stepchildren will play out in terms of inheritance”, Mr Flatters says.
The growth of these less wealthy groups presents a challenge for financial advisers, who have traditionally relied on the most affluent. “These customers are not going to be the same — and arguably, they will need greater support as their finances are more complex,” he adds.
Meeting the needs of these clients could test the current business models of many advisory groups, but Mr Flatters predicts the move online during the pandemic could “take some of the costs out of service delivery”.
Mr Flatters also predicts clients’ needs will increasingly become “cross generational” with demands on the so-called “Bank of Mum and Dad” likely to increase.
“People are helping their children at every stage of their lives in a way that their parents did not help them,” he says, citing university fees, housing deposits and providing for grandchildren as a few examples. “If they think they will also inherit a huge amount, think again.”