Based on their own day-to-day interactions with clients, advisers often assume that it’s the younger generations who are ‘going it alone’ when it comes to financial planning, observes Simon Goldthorpe. Here, he writes at-retirement clients have never been in more need of attention…

Yet a number of recent studies – including a 2019 report from the Pensions Policy Institute (PPI) – have found that it is, in fact, the over-65s who are less likely than average to employ a financial adviser.

Furthermore, the PPI warned that advice currently places too much emphasis on the accumulation phase – on the point of transition into retirement – despite the ‘pension freedom’ reforms of 2015 making decisions much more complex throughout later life.

It has arguably never been more vital that your clients have a decumulation strategy. Here’s why – along with some tips for easily assessing the needs of your client.

We’re living longer than before – and here are the facts to prove it

In 1980, life expectancy in the UK was just under 74 years. So, if you retired at 65, you’d have needed your pension to last you about nine years. But these days your pension might need to last you 20 or 30 years – or even longer if you plan to start drawing your income at the age of 55.

A client underestimating their life expectancy could easily end up drawing out their money much too quickly in retirement, which brings us to the question of sustainable withdrawal rates.

The ‘Sustainable Withdrawal Rate’ of 4% has been a rule of thumb for more than 25 years. However, a recent report by pensions consultancy LCP revealed that sticking to the rule of 4% is now three times more likely to lead to a client running out of money than it was a decade ago. Based on current market conditions and increased longevity, a lower rate may now be appropriate.

Having a robust and tailored decumulation strategy is therefore vital, even more so in light of the FCA’s finding that six-in-10 savers in drawdown with pension pots over £100,000 take out at least 4% a year.

People are making mistakes at retirement

We all know that pension freedoms presented clients with many more options for drawing retirement income. But with increased choice comes increased complexity, and mistakes made at retirement can have profound implications for one’s standard of living throughout later life.

Whether it’s taking too large a lump sum and paying a hefty tax bill or making unsustainable withdrawals as discussed, ‘at retirement’ is a time when clients can, but really shouldn’t, be making costly mistakes.

Clients accessing drawdown without advice tend to do so at a much higher rate and are therefore more likely to deplete their funds, which means it’s essential for advisers to engage with their clients, not just during or before retirement, but on the cusp of retirement in particular.

Exploring the ‘buckets’ needed for a complete decumulation strategy

As retirement as we know it continues to evolve, there is a growing trend among advisers to manage a client’s investments in various ‘buckets’. For those unfamiliar, these can be categorised as shorter-term buckets, which clients can rely upon for regular cash withdrawals, and also longer-term buckets with a high proportion of riskier assets to deliver growth.

Needless to say, each must be constructed with due consideration of the individual client’s personal circumstances – like their health, their accommodation, their fees, their fears and their aspirations.

To ensure maximum effectiveness, there are a handful of key questions to be tackling when considering this approach:

• Firstly, how much does a client need to leave in the short-term bucket, considering that the returns here are likely to be low (and therefore a client is more likely to run out of money)?
• How much should be invested in riskier longer-term buckets to generate ongoing returns?
• Do you have a consistent approach with clients? What processes are in place to ensure client outcomes are consistent?

And, of course, there are also asset allocation considerations – pinpointing when changing circumstances mean it’s time to move from equities to lower-risk assets, for example.

The above factors reinforce why it is so crucial for clients approaching retirement to take professional financial advice. While much of our focus as advisers and planners is on putting a plan in place to build wealth in the accumulation stage, more than ever we have a responsibility to engage with older clients on a decumulation strategy – whether or not they know so themselves.