The definition of good financial advice is that it costs you less than the benefits it delivers – but when the cost is taken up front before the benefits are delivered, how on earth are we to judge what constitutes good value in advice?
Since the rules changed and advisers were no longer allowed to take was was often ‘hidden’ commission from the investments they sold you, the cost of advice is now much more transparent. Another new rule to change the dynamics of advice is that advisers must now undertake an exhaustive process of due diligence on your financial affairs before providing advice. On the face of it this makes a lot of sense – you want the advice you receive to be relevant to your own individual circumstances. However, the scale of the due diligence required means that advisers now have to charge a significant sum to cover the time it takes them. For those with a relatively modest pension pot to invest, the scale of these initial fees can make the whole idea of advice uneconomic, leaving them without access to affordable financial advice. You can read more about this Advice Gap in one of our earlier posts.
With many advisers not publishing their rates and fees on their web sites, and most reluctant to talk about fees until after they have met you for an initial consultation, you could be forgiven for being worried about being ripped off by an unscrupulous adviser. You may even decide to put off looking for advice altogether, considering it too stressful. Well, help is now at hand. www.unbiased.co.uk is one of the main websites providing a directory of financial advisers and they have released a table showing average adviser rates and fees from across the industry for a number of typical advice scenarios. Although the table does not cover every individual case, the variety means that you can work out a rough cost of advice for your own particular circumstances. Their table is shown below.
The variation between the lowest and highest fees can be huge. Some advisers work on a percentage basis, in that they will charge a percentage of the pension pot you wish them to advise on. This works well for smaller size pots. Others charge a fixed fee or charge on a per hour basis. This works best for those with larger pots.
Regardless of the size of your pot, the information provided in the table should allow you to have a sensible initial discussion with an adviser, based on your new found knowledge of what is an average fee for the services you require.
Naturally, if the adviser is coming in over the average, you will want them to explain why you should pay them more, particularly if they are quoting a high percentage fee for a large pension pot – the overhead costs of investing and managing £30,000 is pretty much the same as investing £100,000.
The one area where you may need to pay more is if you have a particularly complex or messy financial situation, with many different sources of capital needing consolidation. You will see in the table that the most expensive fees are incurred for these most complex situations. It will take the adviser longer to unravel such a situation and fully understand your aspirations, so a higher fee is entirely justified. But if this is the case, do make sure that the higher fee is only charged on the advice element of the relationship and not also applied to investment of the consolidated pension pot, where no additional work is required.
Although psychologically difficult, don’t be pressured into signing up with the first adviser you speak to, just because they have given you an hour of their ‘free’ time. The introductory discussion is all part of doing business and is now an accepted part of the process of buying advice. An easy way to make this more comfortable for you is to tell the adviser up front in your initial call that you are planning to speak to several advisers before making a decision. Therefore, you will not be making any commitments during your introductory meeting. This way there should be no question of any uncomfortable tension at the end of the introductory meeting, and no pressure from the adviser .
Once you have visited several advisers you will have a good idea of the going rate for your particular requirements and situation. However, price should be just one factor in your decision. Most advisers should be able to deliver a similar return or income based on your appetite for risk, so perhaps consider some of the softer aspects of the relationship you are about to enter into. The adviser could be looking after your financial security for around 20 years of retirement so it is important that you like them; that you feel they understand your situation; and that they will be responsive should you have any questions or concerns down the line.
Any guidance on what financial advice costs has to be a good thing, but do these costs match what you have paid or have been quoted in the real world? Do you think such ‘average’ fee guidance is helpful for your planning and negotiation with an adviser? We would love to know. Drop us a note in the comments section beow.
One of the most important factors one needs to consider when planning for your retirement is to ensure that your pension lasts throughout your retirement – the risk of it not doing so is known as Longevity Risk, and is certainly something that your adviser should discuss with you if you choose to seek advice. Making your pension last as long as you do is easier said than done – predicting the state of your health up to 25 years in the future is almost impossible – as indeed is trying to predict the inevitable improvements in healthcare that will occur in the next quarter of a century. The Government likes to think that it has made this prediction process slightly easier for us all by publishing life expectancy projections. These are based on historical data as well as recent trends in the increase in life expectancy, and are the best we can get at the moment. Statistically, they can tell you the very day on which you will die, if you are the average person born on your birth date. But as we all know, none of us are average.
Well, the first thing to do is to get to grips with what ‘average ‘ life expectancy actually means. The chart below shows the most recent life expectancy projections for people who are now aged 60, 70 and 80. In the absence of any other guidance it makes sense to make sure that your pension will last as long as, and preferably a lttle longer than your life expectancy. We have a variety of pension calculators to help with this; our ‘Dead Parrot’ Calculator allows you to enter your birth date and the size of your pension pot – the Calculator will then tell you how much you can afford to withdraw in income each month if you want that income to last as long as you do. The UFPLS Pension Drawdown Calculator comes at the problem from the other direction in that it allows you to input a desired monthly income from your pot using the Uncrystallised Fund Pension Lump Sum scheme – the Calculator will then tell you the age at which your Pension pot will have shrunk to a zero balance.
But this is not the whole story of course, because it is in the nature of what an average is, that as many of us will die before that average age as will live beyond it. The second chart shows the real life bell curve of actual deaths of people who are now aged 65.
Whilst the average 65 year old will live until they are 86, 50% of those now aged 65 will live longer – one in four of them (25%) will live past age 90 and one in 10 will live past 95.
To accommodate this risk of outliving your pension can be expensive, and is one of the reasons why annuities are still relevant to retirement planning. Retrement plannng schemes from pension providers and advisers are increasingly combining a drawdown strategy in the early part of retirement with the purchase of an annuity at a later age, when the cost of securing a reasonable income for life is lower.
Financial Advisers consider that the longevity issue is the single most important aspect to consider when retirement planning. This is where advisers earn their fees because, while the risk of outlasting your pension cannot be completely eliminated, it can be planned for and managed through a variety of techniques, financial products and planning strategies (like the drawdown/annuity option mentioned above).
The management of Longevity Risk is a complex task and one that is certainly worth discussing in detail with an adviser. As we have discussed elsewhere, such advice is no longer cheap – but if it means you are able to enjoy your retirement and know your money will last as long as you do, then you may consider it a good investment.
Do you have any experience of managing longevity risk that you would be happy to share, or have some thoughts on the best way to approach it? All comments and ideas are always welcome.
Closely aligned to the Ready-made portfolios offered by some of the direct platforms (which we look at elsewhere) are the lists of recommended funds selected by platforms. These are the funds that the platforms and their in-house experts consider to have a good fund manager, a reliable track record and are likely to do well for their investors over time. Without such guidance, and with over 2,000 funds to choose from, it is easy to be influenced by whichever fund is top of the league tables at the time or is being tipped by commentators, who may receive a commission for doing so.
The star ratings applied to funds by platforms, who variously brand them as ‘Premier’, ‘Calibre’, ‘Best Buy’ or ‘Wealth 150’ lists can therefore offer a more objective approach to selecting funds for your portfolio. If you cross reference the lists to see which funds appear in more than one list you can be reasonably sure of finding a fund that has a better than average reputation – however, research in 2014 by The Platforum, a fund consultancy, found that not a single fund out of nearly 400 listed on the ‘buy’ lists of eight of the biggest brokers appears on every one. Just five funds appeared on seven out of eight lists, and only 16 managed to get onto five lists. (more…)
Crash may force retirees to reduce annual drawdown income by 9%
In a recent post I covered the potentially catastrophic impact on recent retirees of a market crash so early on in the drawdown of their pension. The concept of ‘sequencing risk’, as it is known, works like this – during a weak market as we have seen recently, if you sell assets to maintain a set level of income, you have to sell them when they’re worth less. In other words, when the price of the shares or funds you hold is lower, more of them need to be sold to provide you with the same amount of cash. Selling more units means weaker returns over time and reduced income from dividends or bond coupon payments, so more units have to be sold in the future to maintain the same level of income.
In the post on ‘5 Ways to Protect your Retirement and Pension when the Markets crash‘ I included a hypothetical chart showing the impact of Sequencing Risk – but now Aegon have modelled the impact of the real market crash on a retiree who invested their £100,000 pension pot in drawdown in early April, with a view to taking £5,500 a year of income from the pot.
Based on performance of the FTSE-100 since the new pensions rules came into force on 6 April, Aegon calculated that a retiree with £100,000 invested who started drawdown on that date could well have seen the value of their pot decline over 10% in the last five months. The result would be that their savings would run out around five years earlier than expected, assuming no pick-up in equity values beyond typical growth rates.
Given that the market downturn has occurred early in retirement when the pension pot is at its biggest, such a fall has particularly unwelcome consequences – as the chart shows, the retiree would need to reduce their subsequent income by £500 a year, or 9%, to compensate for the impact of this market fall early in retirement.
As more and more retirees opt for the flexibility of drawdown over the certainty of an annuity, the recent market crash will highlight the importance of addressing this issue and regularly reviewing retirement planning assumptions – including measures to mitigate against the negative impact of any future such market falls. We covered some of the ways to mitigate the risk in the recent post, but one we have yet to cover is the relatively recent emergence of guaranteed drawdown policies, in which a minimum level of retirement income is guaranteed. Clearly there is a cost attached to such a guarantee, but these policies do provide something of a halfway house between the certainty of an annuity and the risks involved in drawdown. As such they certainly merit investigation and consideration by those looking at a drawdown option.
Not surprisingly, given their highlighting of the issue, Aegon have their own guaranteed drawdown product which you can review on their site. We will be looking at some of these products in future posts and trying to assess whether they offer a credible and worthwile alternative to the other options available.
Over to You
If you have recently taken out a guaranteed drawdown policy we would love to hear from you – tell us how easy it was to understand, the process you went through and any advice you took beforehand, and from whom. A small prize awaits the most interesting comment.
Many of us who have retired in the last ten years or so and are taking an income from our pensions will be waking up this morning and facing the prospect of a catastrophic hit to our future prosperity as a result of the market crash.
The situation will be particularly acute and troubling for those who have taken advantage of the Government’s relaxing of the pension rules since April to start drawing a regular income from their pension pots.
Why is the Market Crash so Devastating to new Pensioners?
One of the most serious, yet least well reported risks in the early stages of pension drawdown is that of ‘Sequencing Risk’ – the dangerous impact on your investments and long term prosperity of a market downturn that happens just after you retire (or anytime in the first 10 years or so after retirement). Many of us assume, because the adviser and marketing literature encourages us to do so, that if we predetermine a modest level of regular income withdrawal (4% seems to be the accepted reasonable withdrawal rate), we will be able to carry on indefinitely – and many of the pension calculators (including our own) and models used by advisers and pension providers make that ‘straight line’ assumption.
This is the idealistic (but seldom realistic) smoothed investment growth curve of the ‘Your Plans’ diagram. However, life is seldom a straight line and we are at the mercy of the unpredictable path that markets have a habit of springing on us. In this case, the ‘The Universe’s Plans for You’ diagram is the more likely.
Taking regular and identical withdrawals in times of market weakness such as that depicted by the diagram can be catastrophic – destroying the health of your pension pot and causing you to run out of money much sooner than you might have planned.
Sequencing Risk works like this – during a weak market, if you sell assets to maintain a set level of income, you have to sell them when they’re worth less. In other words, when the price of the shares or fund units you hold is lower, more of them need to be sold to provide you with the same amount of cash. Selling more units means weaker returns over time and reduced income from dividends or bond coupon payments, so more units have to be sold in the future to maintain the same level of income. This chart shows how damaging such a course of action can be to the number of years your pension will last.
Option 1 (but not really an option at all) – Don’t do Nothing
The first and most important thing is not to do nothing. A crash such as that which has been happening to the markets over the past few weeks demands your attention. Even if you later decide not to take any action it should be because you have reviewed your options carefully and made a conscious decision not to do so. Unfortunately, we are all subject to psychological influences that leave us unprotected in certain investment situations. We cover many of the psychological risks of investing in our Risks and Psychology of Investing section but a concept known as Situational Blindness is particularly damaging in times of market weakness. In Situational Blindness people have a tendency to just shut out the prevailing market realities in order to do nothing – postponing the evil day when the losses just have to be confronted. If you know that the underlying value of your pension pot has just been dramatically reduced in the crash, yet you read everything in the newspaper apart from the financial pages, and choose not to check the diminishing value of your pension pot, you are probably suffering from this blindness effect. I know that I suffer from this one – I check the perfomance of my portfolio daily when markets are rising but I let the daily check slip when markets are heading down or have suffered a correction – just the time I should be checking and taking any remedial action necessary.
So – recognise the psychological state you might be experiencing and resolve not to be affected by it – review your situation in the next few weeks when the markets seem to have reached their lowest point and decide on a course of action.
Option 2 – Access your ‘rainy day’ cash reserves
If you received advice from a financial adviser before you started drawdown, or had the good sense or the spare funds to do so, they will almost certainly have advised you to retain a cash reserve in the event of a rainy day. Well, the torrential downpours in the south of England yesterday heralded just that – a very rainy day for your investments! If you have the luxury to do so, now is the time to consider making use of that reserve to fund your monthly income from cash and not from your pension. This allows you to postpone withdrawals from the pension until market conditions improve, and avoid the impact of the Sequencing Risk mentioned above.
Option 3 – Withdraw just the ‘Natural Yield’
Withdrawing just the income generated by the underlying investments is known as taking the ‘natural yield’. This leaves the underlying investments intact, improving the prospects for capital growth and a rising income over time, although as we all know both capital and income can fall as well as rise. There are a number of ways to generate a regular income within a drawdown account: for instance dividends from shares, or income paid by bonds. You could of course buy the shares or bonds directly but the safer approach unless you are a skilled investor is probably to use an experienced fund manager to make the decisions for you by buying into those income funds that have the principal objective of delivering a regular income.
Option 4 – Reduce the Size of your Monthly Withdrawals
When setting up your drawdown you will probably have approached it by deciding initially what level of income you needed each month to meet your outgoings. If you estimated on the conservative side and now find you have a small surplus at the end of each month, now might be a good time to consider reducing the level of withdrawals, at least temporarily until the markets recover.
Option 5 – Reduce the Volatility of your Investments
Unfortunately, this Opton is all about hindsight, and is not really something to consider until the markets recover. However, not everyone appreciates that financial markets regularly suffer suffer large corrections (or it may be just poor or selective memory that prevents us from taking these into account). Putting the risk in perspective, the US markets (yes, I know we’re in the UK, but that’s where the research is from) suffer a market decine of at least 15% once in every 2 years, lasting an average of 216 days before regaining their previous level! Consciously reducing the volatility of your investments through diversification and careful fund selection can reduce the impact of major market corrections, but as we have seen recently, when the markets are in freefall pretty much everything heads south.
Over to You
If you have any other ideas or techniques for protecting your pension pot during market crashes, or you would just like to share your thoughts, do please make a comment below. We will be revisiting this topic when the markets have started on their recovery, so do please sign up to the Newsletter for regular updates and thoughts on how best to manage your Pension.
When we started the UK Pensions Blog, our research into the new Pension freedoms indicated two pretty clear routes for those seeking to manage their own pensions in retirement. If you know a little about investment and are confident in your own knowledge and ability to manage your own Pension there are a multitude of DIY investment platforms out there – all ready and willing to take your money and provide you with the online functionality to manage it as you desire. Platform charges vary widely depending on which features you consider most important but we have included best buy tables to help you sort the wheat from the chaff.
Conversely, if you are new to investing and need more detailed guidance, there is also what should now be a well established route – start with a call to Pension Wise to arrange a detailed telephone or face to face discussion about your options and to learn about the pooh traps you need to avoid. Then go and see an Independent Financial Adviser (IFA). They will be able to review your situation in detail and provide the regulated advice and investment support that you will need to manage your Pension effectively throughout your retirement. If you don’t know an IFA personally, (and let’s face it, few of us do) we review the comprehensive web sites that point you towards a local IFA. Several of the sites even have detailed consumer reviews of the IFAs, rather like TripAdvisor.
But the simplicity of such a twin track approach has been skewed by the market and recent regulation, such that for many new retirees, advice from an IFA is either not available or is just too expensive. So how has this happened, and what can be done about it? (more…)
Those approaching pension access age of 55 are increasingly being caught in a perfect storm, cast adrift in an ocean patrolled by hostile sharks, all prowling for the opportunity to separate prospective pensioners from their pension savings. Pension scams are increasingly sophisticated – and you’re a target!
Imagine the scenario – you have worked hard all your life and have accumulated a reasonable pension pot that you hope will keep you in moderate prosperity when you retire in a few years time. You’ve heard about the 2015 pension rule changes but, with a few years left before you retire you decide to look into it all nearer the time.
Out of the blue comes a phone call (more…)
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