Thoughts on abridged pension advice – planning for the unplanned?

Before we scuttle down any dark alleys keep in mind this isn’t regulated financial advice.

Contact the regulator to find an authorised and regulated ‘advisor’ if you need one.

The purpose of this post is for thought and  critical thinking – free from censorship and skewed regulatory interference.

If you don’t like thinking go elsewhere.

The possibility of needing funds in an unplanned way and the likely impact this may have on our funds in retirement.

This is one post in a series of posts exploring abridged pension advice so make sure you read this introductory post, then this post on the role of a pension specialist and then this post covering death.

All the very best efforts can be made on forecasting income needs into retirement and rightly so. 

However, there may be shortfalls to consider – for example the time until access to state pension benefits (current state retirement age is 67) is available.  As such if an individual is considering retiring at say, 60 years old, there will need to be enough income to make up any shortfall during the period from age 60 – 67.

Abridged Pension Advice – Planning for the Unplanned and Cashflow

The starting point is good cash flow forecasting.

This can be as simple as using pen and paper to using more sophisticated computer algorithms/calculations/projections etc based on a number of variable factors such as anticipated inflation rates, returns and charges etc.

The bottom line for cash flow forecasting?

What will your costs be, how much will you need (and for how long), and how much will you have available.

What Will your Costs be in Retirement?

You may be mortgage free, you may have a fixed amount of savings and investments, you may even have other defined benefits or money purchase pensions in payment.

You will (or should) have a good idea of how much (barring extreme inflation) your monthly/yearly costs will be.

Of course, the further away you are from your retirement date the harder it is to accurately predict your exact costs and income requirements and how much money you will need.

But if you’re quite close to your desired retirement date you can accurately (well almost) predict what your day to day costs will be (essential costs) and  what other costs you anticipate – such as gifts, holidays etc (discretionary spending).

Once you have this figure and divide by 12 you will know your monthly income requirements.

Wait a minute –  I wasn’t expecting this?

But is there potential for having to contribute to a wedding for one of your children/grandchildren?

Or even stepping in to ‘pick up the pieces’ from a marriage ‘gone wrong’, as so many of us have to do?

Could there be unexpected health needs that require private health care and associated hefty costs?

Could there be an unexpected need to fly to the other side of the world to see an unexplored canyon or just tick off some items on a ‘bucket list’?

Many of us have desires (and even necessities) that may require funding outside of our monthly available income.

Thus, it’s imperative to factor in any potential ‘unplanned’ income needs that may arise.

As methodical and controlling as we may think we are – later life can be driven by emotions as strongly as in our youth and just because you retire doesn’t mean you won’t be prone to impulsive decisions!

And just because you consider today that everything is predictable and planned, this can, and does change.

As such an unexpected chunk taken away from a retirement pot has consequences.

A [problem] of choice and temptation?

In comparison to a fixed income that is provided by a defined benefit pension, there may be the temptation (and ability) to access as much of your pension as you like, if a decision is taken to transfer away. 

And this presents a potential problem.

We touched on longevity risk (in this post) and this is a crucial consideration when looking at the potential ‘sustainability of funds’ over time.

The longer you live equates to a higher risk of the sustainability of your funds over time.

As with much contentious and subjective reasoning we can only do guestimating (that’s not really a word but gives you the idea).

We can look at Office of National Statistics data and get average life expectancy which only acts as a guide (somewhat reassuringly to some) but what else can we do?

We can look back at our own unique family history in regards to health, especially our parents, grandparents and great grandparents in order to analyse their types of death and importantly the age they passed.

Obviously, a history of lower than average life expectancy due to certain (perhaps inheritable illnesses) doesn’t mean that you will suffer a similar fate but it’s more likely than not (ignoring other lifestyle factors).

If, by comparing the two we come to the conclusion that we may well live a long (and hopefully happy and fulfilled life) even more serious cashflow forecasting will be necessary.

So get your calculator ready.

And let’s start real simple.

Abridged Pension Advice – Planning for the Unplanned Scenario

You’re 53 and have a couple of DBs kicking around from when you worked for a (dodgy) bank in the 1980s/90s and another one from when you worked for the local council.

You’ve spoken to Clive Sales (your trusted advisor recommended by your friend Sue) and as your mortgage is almost clear and the kids have left home. You tell Clive you want to retire earlier, at 60.

You do your maths and conclude that you will need 30k to live on which will cover essential costs and discretionary costs from the age of 66. You’re married to Simon and both of you will get the state pension at 66 (so around 16K at current levels) that leaves a 14k shortfall each year.

Of course the state pension may well be much higher but don’t count on it too much in such ‘fluid’ times that we live in.

In crude terms (without taking into account inflation, returns and costs)

14 years X 14k = 140K

£140K to take you to age 80.

Easy peasy you think (as Clive has guestimated you may get transfer values of £250K and 160K based on similar offers he’s been cashing in for other recently).

Surely, 410k invested to day will pay the income you require?

Then you realise that your income needs will be substantially more from the age of 60 to 66.

You don’t want to work part time or any of that sort of nonsense. Yet, you also know that apart from 10-15K emergency funds there’s little in the way of ISA savings or any savings at all.

Effectively, (and on the basis of good health) income requirements look more likely to be around the 40K mark for the period up to claiming the state pension.

7 years X 40K = £280K

You get the picture in a crude sense.

In a worst case scenario, after transferring inflation is rampant (in 2021 the official forecast is 4%+) your returns are negligible and associated investment costs are comparitively high. 

Very soon your fund will start to look bad, in fact it could look miserably ugly.

But your forecasted income requirements will not reduce. If anything they will undoubtably increase.

Oh, dear. That’s all looking a bit doom and gloomy so lets paint a different picture.

Inflation is 1%, you get 10-15%% returns annually and consistently and charges (all in) are 2-4% per year of  your available funds.

Phew – that definitely sounds better!

Guestimating is the apt word and whilst you may prefer the latter things may be closer to the former (or somewhere in between).

Abridged Pension Advice – The Likelihood

In either scnario and what ever other scenarios you care model out, the fact of the matter, is that an Unplanned withdrawal is likely to significantly impact both the available funds invested (for the remainder of your retirement) and the growth (if any) you get on such funds.

Obviously, the impact is directly associated to the overall amount of available funds (with more equating to less impact) but careful consideration is necessary.

It’s wise to keep in mind that whilst you may not have (or anticipate) an need to access funds in an unplanned way, it’s important to evaluate (and much of this could be assessed on current spending habits to date) anyway.

Ultimately, this is to accurately assess (or as close as) the ‘likelihood’ of accessing funds in an unplanned way and potentially diminishing any retirement funds available.

In a financial regulatory/compliance sense justification may be provided by an advisor that accessing in an unplanned way is unlikely but any such justification must be backed up by rigourous investigation, analysis and evidence.

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