There are some major changes coming to pensions from April next year and there is no doubt people already in retirement or approaching retirement age will see an explosion in the options open to them. This will be complex and quite daunting for many people. Without proper advice many will struggle to make informed decisions. In fact, without a proper financial plan to provide a context for making informed choices, there is a real danger of “paralysis by analysis” or “rabbit in the headlights syndrome”. Some people might not draw as much from their investments and pensions as they could easily afford while others may blow the whole pension on a Lamborghini. The reality is most people will be somewhere in the middle and in need of a clear framework for making these important financial decisions.
These changes will obviously affect many people who have already retired but they will also have a massive impact on those nearing retirement. In recent years many large organisations offered senior staff the chance of an early retirement or redundancy “package” which often looked attractive. The problem for people in this situation is to figure out whether they can afford to take the package or not. Business owners wanting to sell their business to retire face a similar dilemma. There is no doubt that a huge number of people will need to make big some of the biggest financial decisions of their lives very soon. Unfortunately, very few are armed with the necessary tools or framework to make sense of these options. They need to know can they afford to sell or retire and many have no context for making that kind of life changing decision so it’s a very stressful time for lots of people.
Traditional financial advice, whether from an Independent Financial Adviser (IFA) or a Restricted Adviser, has been very good at answering clients’ questions. Unfortunately, it often ends up answering the wrong question because it’s ill-equipped to answer what people are really looking for but can’t quite make themselves ask. In fact we named our firm Forty Two as a reference to the cult book The Hitchicker’s Guide to the Galaxy where a Super Computer named Deep Thought gives the answer to the ultimate question of life the universe and everything. The answer is 42! When the characters in the book say this can’t possibly be correct the computer tells them the answer is most definitely 42 they just don’t understand the question. I thought that was a great analogy for the traditional financial advice process.
Often the first meeting with a new client will start with a question about their existing investments or pensions. “Should I transfer my investment portfolio to a better performing provider?” or “what is the maximum tax free lump sum I can take from my pension?” Sometimes it starts with something very direct like “I have a fixed term bond with XYZ bank maturing this month, where should I invest the proceeds?” Obviously, a good financial adviser should be able to answer these types of questions but it’s not what the client was really asking. If the adviser had let the client talk for a little longer before offering a product or technical “solution” they would have found there was a subtly different, and much more powerful, question lurking beneath the surface. We often find that question is something like “Do I have enough money to lead the life I want to lead and never run out?” To put it more bluntly they want to make sure they don’t have too much life left at the end of the money! Another question we often find is “will my family be able to lead a comfortable life in the event of my death?”
Whether Standard Life, Scottish Widows or any other company has the best past performance or most flexible product features isn’t nearly as important when it comes to client peace of mind as simply finding out what their “number” is. Their own personal “number”. “Do I need £1m, £2m, £2,342,654 or £10m to make sure I can do everything I want with the rest of my life?” It’s only once you know the answer to that question that you should even start thinking about products or solutions such as a well-constructed, diversified investment portfolio which is managed tax efficiently. Obviously, the technical detail is important and must be looked after carefully; but only AFTER you have some form of decision making framework for reference. Without a context to make decisions about pensions and investments we are really just buying products in the dark.
Even once you have devised a financial plan it is vital to keep it under regular review. Life changes, investments perform differently than expected, tax rules and pension regulations change. Any navigator or military general will tell you that you start out with a plan knowing it will be wrong and you constantly make small adjustments as new information becomes available. However, I always remind myself of the old adage that to fail to plan is to plan to fail. Life is not a rehearsal; we only get one shot at life and we need to make sure we make full use of our financial resources to avoid looking back and regretting the things we could have done but didn’t because we didn’t know if we could afford it.
Even after April 2015, pensions may not be the answer to the ultimate question of life, the universe and everything but a good financial plan just might be.