Retirement Income Tools: Building on the advances of savings tools

29 Jul 2024

First seen on FTAdviser

Sometimes the simple ideas really are the most effective.

The 'save the change' concept is a good example - which was introduced to encourage people to put a little extra aside without having to really think about it. Rounding up transactions to the nearest pound and saving the difference can soon add up. It harks back to the phrase, 'Take care of the pennies and the pounds will take care of themselves'.

Evolving financial tools

As with all good ideas, the concept has evolved over time with different options provided by traditional banks or building societies, challenger banks and dedicated savings apps. Roundups, automatically transferring money into a separate savings account, transferring cashback amounts or responding to nudges around impulse saving – all have a part to play.

Open banking has created more opportunities, giving consumers greater control over their financial data and enabling providers to personalise products and services. By automatically monitoring current account balances, suggestions can be made to encourage people to save more when they can.

Making little tweaks to everyday financial habits has the potential to help boost savings - achieved by implementing a few simple tools, a couple of prompts to get things off the ground and then you were able to sit back and let the rest happen.

Stimulating Pensions Engagement

When it comes to the world of pensions, the closest thing is probably the introduction of auto-enrolment. It's allowed for millions of people to start saving towards their retirement. This can only be a good thing.

But as the word 'auto' implies, it doesn't require much thought. While that's been useful, it could also be considered a drawback and go some way to explain why pension engagement is often deemed to be low.

If people don't have to think about it, then they might not consider moving beyond the minimum contributions. This could hinder their prospects of a more rewarding retirement. But it's a start and we have to start somewhere. It’s put the foundations in place for us to build on. There’s plenty more work to be done.

Saving for retirement requires a great deal of individual responsibility and it’s why I consider good quality financial advice to be more important than ever.

How long will my pension last?

Pension freedoms have enabled people to have greater control of their retirement funds and many have taken advantage of accessing their private pensions earlier. This might be to help them achieve their retirement dreams, but it comes with the risk of pension funds depleting quicker than expected if people are not careful.

Throw into the mix that as a society we tend to be living longer and it creates a perfect storm of not having enough money to see out the rest of our lives. I'm sure advisers are all too familiar with the burning question from clients: 'How long will my pension last?'

There’s no set answer to this but that’s why advisers help clients to determine their goals and implement a plan to ensure their money works as hard as possible. And of course, whenever we try to predict retirement income, it’s always worth keeping its nemesis – sequence risk – in mind too. Investment portfolios can fall victim to market shocks and if this happens earlier on in retirement alongside large withdrawals, it can have a detrimental impact over the long term.

We’ve seen some worrying trends around how much money is being withdrawn from pensions and the rate it is being taken out. We might not always know the context around such figures. But overall, it’s not likely to be sustainable for the average person.

The transition from accumulation to decumulation can be a daunting prospect for many. And there’s a lot to consider when drawing down on pension funds.

Retirement income tools

So, what about retirement income? Could the pensions sector learn from the savings world and potentially reverse engineer the 'save the change' idea?

Cash flow modelling tools and investment strategies allow advisers to focus on the inputs but potentially the missing link is controlling the outputs and adjusting income taken when appropriate. Could retirees shave money off the income they need each month and keep it invested for longer? And could we make this more of an automated thing, so it doesn’t need to be mulled over at length? Especially as we have seen this approach has worked to some extent elsewhere.

If people find themselves with more cash at their disposal they could decide to withdraw less. Open banking could help in this regard to facilitate the automatic rule application. Sounds simple, doesn’t it?

Clients could sit down with their adviser and set up a few basic rules around what they need as a bare minimum to cover the essentials and fixed expenses, factoring in some additional discretionary spending and some fun money. Allow a bit more for the smaller luxuries in life, plan for some of the bigger ticket items and fine tune accordingly to a level they would feel comfortable with.

It could fit in well with cash flow modelling but also be modelled on managed funds performance and make a real difference to the pension pot. A lot can happen in a year before you may next sit down properly with your client to fully assess their situation. If they have been taking significant withdrawals or more than needed and the markets suddenly seem less favourable, it can be difficult to recover.

So, if expenditure varies or investments fluctuate, a system could be set up that considers things on a monthly basis, for example. Income could be adjusted to avoid over selling investments. If we recognise the importance of saving more when we can, we could warm to taking less when we can as well.

Previous Article Dunstan Thomas Products Contact Us