LATER LIFE PLANNING
Martin Lines Development and Events Director Just Group
We use drawdown so we can pass money down the generations – don ’ t we ? Only a generation or two ago , retirement was something that happened to you . Those in the pre-baby-boomer cohort reached a certain age and collected their gold watch for lifelong service . Even though they no longer had to show up at work , they continued to get paid by their employer in the form of a nice and stable monthly pension … You didn ’ t have to do anything or decide anything , it all just happened . Now , for all the reasons we are very familiar with , the majority of us will spend our later years having to make significant financial decisions , managing trade-offs and accepting that retirement is ultimately a compromise … we can no longer be passive and just let things happen . Many will use the professional services of a financial adviser . They trust the adviser will use their knowledge and experience to advise them on the right balance between their wants and their needs , or in regulatory language , manage the sometimes conflicting needs and objectives of their clients . Understandably , because we ’ re only human after all , a retiree ’ s wants are often focussed on a desire to continue to protect and nurture their family by aspiring to pass on capital to loved ones after they ’ re gone . However , this want is often at odds with reality and the need to use this capital to provide themselves with sufficient income to meet their continuing lifestyle expectations . The art of the adviser is balancing these competing requirements and finding the optimal way of achieving sustainable income with one eye on maximising legacy provisions . The answer when it comes to pension assets is typically the capital markets and flexiaccess drawdown – and why not ? Well , most art has some science behind it , just take Michelangelo and the Golden Ratio as a classic example . When we start to look through a more scientific lens at how best to balance these competing retirement needs and objectives , some interesting data emerges . It feels intuitively right that if providing a legacy is a relatively important priority , then a sound strategy will be to maintain the capital base and invest it in a well-diversified portfolio . But is that intuition right in terms of it being the optimum approach ? To answer this , we need to consider two things . Firstly , when is the legacy event most likely to occur . Average life expectancy is now commonly understood to be the point at which mortality data suggests the cumulative risk of dying is the same as still being alive , i . e . 50 / 50 . It therefore makes planning sense to try and ensure that legacy potential is optimised from this point forward as the cumulative risk of dying increases . It should obviously be noted here that some people do not achieve average life expectancy and an individual ’ s personal and family history needs to be taken into consideration . The second thing to consider is linked to the first , although this may not be immediately obvious , and that is what ‘ assets ’
do you invest in to achieve this optimum journey ? It has become increasingly difficult to truly diversify a portfolio as diversification requires assets that are non-correlated . There is , however , one investment opportunity a retiree has that others do not , which is to gain exposure to the potential value of mortality credits by using some of the portfolio to purchase a guaranteed income for life . As you can see in the modelling chart below , using just over 25 % of a £ 400,000 portfolio to buy Secure Lifetime Income ( SLI ) via the Novia SIPP helps to increase the projected asset value from around age 86 onwards , compared to a typical 60 / 40 equity / bonds portfolio , thereby optimising legacy potential when it is statistically most likely to be called upon .
There ’ s obviously some information around the chart and the modelling above , but hopefully the point is clear : if , as an adviser , you need to try and balance competing objectives of reliable and sustainable income plus planning for optimal legacy provision , accessing mortality credits through a guaranteed income solution such as SLI can help you improve portfolio values when it matters most !
To find out more about integrating SLI into drawdown portfolios , please get in touch with your Novia or Just Account Manager .
For more information
• Call : 0345 302 2287 Lines are open Monday to Friday , 8.30am to 5.30pm
• Email : support @ wearejust . co . uk
• Or visit our website for further information : justadviser . com
Please contact us if you would like this document in an alternative format .
# 03 | AUTUMN 2021 | 29