Retirement income advice has always been one of the most challenging areas of financial planning given the uncertainty around client needs, market returns and even how long a client might live. Despite this, the environment for retirement income advisers has been relatively benign. Bar a few wobbles, markets have generally been kind, inflation has been muted, and low-interest rates have helped support a huge growth in the use of invested solutions for retirement.
All this has changed over the past eighteen months leaving many retirement advisers and their clients having to rethink what they’re doing. In our recent research report, ‘Life Beyond Work: The changing face of retirement’, we looked at how clients and their advisers are responding to this more challenging environment. We found that both groups are already making adjustments and that further change is inevitable, spurred on by increased regulatory focus and changing client circumstances.
It might be tempting to think that wealthier advised clients can absorb price increases and generally benefit from interest rate increases. Yet three-quarters of the advisers we surveyed cited the cost of living as a key concern for their clients and 80 per cent expect this to increase over the next few years. At the same time, the sharp rise in interest rates has meant many retirement portfolios, which tend to have a high proportion of assets in fixed income, have suffered big losses. Clients need to get more from less.
As inflation has proved hard to tame and markets have remained difficult, meeting client expectations is now second only to regulation in terms of its impact on advisers’ businesses. Clients are having to readjust plans, with two-thirds of advisers telling us they expected clients would likely have to delay retirement. Over half expect those already taking income will have to reduce withdrawals even though their income needs may be increasing. Fifteen per cent of advisers thought some clients might have to return to work to make ends meet. While this may seem a low number, the idea that any advised client should have to “unretire” must ring alarm bells.
While most retirees may not have mortgages, higher interest rates increase the costs of supporting children who do, and care home costs are reportedly rising much faster than inflation. Add to this the complexity of higher divorce rates amongst this cohort of retirees compared to previous generations and we find that changing family dynamics are likely to be a significant factor in the coming years.
What does all this mean for retirement advice? Use of annuities is increasing with advisers saying just under 20 per cent of their business over the first half of 2023 went to annuities or blended products. Higher rates are the main driver, with two-thirds of advisers saying they expect their use of lifetime annuities to increase over the next few years.
The use of cash flow planning is also set to increase because of perceived regulatory expectations, increased economic and market uncertainty, and the need to model more complex client circumstances. We found that 92 per cent of firms use cash flow planning, but less than a quarter use it for all clients. While it may not be needed in all cases, over half of firms expect to use it more going forward. Improvements in cash flow planning software and its integration into other advice systems will also make its wider use more feasible.
This increase in cash flow planning is part of a broader trend towards a more holistic, goals-led approach to retirement planning. Advisers expect more traditional areas of retirement advice such as inheritance and tax planning to expand. But many also see scope for growth in the areas of long-term care planning and housing advice, two key areas given improved longevity and the likely growing need to dip into housing wealth to support retirement income. This could lead advice firms to move towards a structure where the adviser becomes the conductor of an orchestra of specialists brought together to meet the varied needs of retirement clients.
We are certainly in a very demanding time for retirement advice, and much is likely to change over the next few years. But let’s not forget that the value of quality professional help is immense, especially compared to the outcomes people would likely achieve if left to their own devices. Financial advisers have proved themselves to be incredibly resilient over recent decades and will no doubt be able to navigate the challenges ahead.