There’s more to the State Pension when retirement planning than just knowing how much it is and when it can be accessed, says Alastair Black, head of Platform Proposition at Standard Life Aberdeen
Money Alive recently did a piece of research on the State Pension. It’s interesting because it highlights the importance of advisers and paraplanners in ensuring clients understand what the state pension is and how it can be used to support their overall planning goals.
It also got me thinking. With the focus on DB to DC advice and expected future focus by the FCA on DC retirement advice, how can advisers and paraplanners usefully make use of state pension in the Retirement advice process? In reality it’s much more important than just helping the client understand what and when it is due.
1. It is a cheap way of securing a guaranteed income underpin.
In the run up to retirement, discussing the option of maximising the state pension to ensure having the biggest guaranteed amount possible will usually be a good thing to do. Once a client realises how much it costs to buy a guaranteed inflation linked income for life, they will see how cost effective maximising their state pension can be.
2. The value of a guarantee and managing customer bias.
The retirement advice process will consider both guaranteed income for life (annuity) and flexible income (drawdown) options. The cost of annuities can be quite emotive for some, and customers often carry a bias that these are poor value. Conversely, some customers find it difficult to deal with the uncertainty of investments, so the true value of a fixed income product can be very high.
It can be hard to demonstrate to a client the true value of a guaranteed income for life, both in how much it costs, and how important it may be as part of their retirement income. Getting them to articulate the value they place on the state pension when discussing retirement planning can be a good way to demonstrate its value while ensuring client understanding.
3. Capacity for loss.
As part of any retirement advice, advisers must consider a client’s capacity for loss alongside their attitude to risk. Put simply, capacity for loss is whether the client can afford to lose their investment or the future income from it. It can be measured by understanding the minimum regular income a client needs (or more likely, wants) to rely on. It can be difficult to get a customer to determine what that minimum income level is but the State Pension can be used as part of this conversation, asking a client how they might feel if they only had the state pension to rely on. For some that might be okay but for most you would predict their expectations to be higher. While not enough on its own, the State Pension could be a useful term of reference.
4. Tax planning for clients with a significant state pension
This is a great opportunity to clearly explain the benefits of looking at income across all a customer’s assets. When the State Pension kicks in, it’s likely to use up the majority of the client’s tax-free personal allowance. This gives the opportunity to explain the benefits of drawing taxable income from their pension before the State Pension starts. We know tax planning is a key area customers value and the state pension can be a useful entry point into that discussion.
5. Consolidate all assets under advice
By demonstrating how the State Pension (which the adviser can do little with) influences advice around how much income to take and when to take it, really highlights the importance of the adviser being aware of all the client’s assets. This could be a helpful way to explain why the customer should make the adviser aware of all of their assets, even that cash ISA they have saved for a rainy day.
It’s clear that State Pension is a critical part of retirement planning. But more importantly the unique nature of it given it’s a fixed part of a client’s plan gives the adviser a number of useful options to help enhance other parts of the advice process.