Life expectancy may have stuttered over the past two years, sitting at an average of 85 for people over 65, but as populations continue to grow and live for longer than ever, it has never been more important to make correct and informed choices about how our assets will last the course.
Here, Tony Duckworth, MD and Chartered Financial Planner at Cowens Financial Architects, discusses how we can safeguard our precious pension pots through sound financial planning.
It’s no secret that state pensions aren’t enough to cover most people’s plans for their leisurely retirement years. The push on the need for private savings from the government and the introduction of the compulsory work-place pension in light of these ever-increasing age stats have further heightened the pressure on working people to get their finances in order. The good news is, it’s never too late to start putting the wheels in motion to build a portfolio of assets designed to meet your future financial needs, while also ensuring loved ones are protected should the worst happen.
The introduction of Pension Freedom in April 2015 means that anyone over the age of 55 can now withdraw their hard-earned private pot as a lump sum, paying no tax on the first 25%. This move, although liberating for many soon-to-be retirees, has opened a labyrinth of options and potentially wrong decisions.
Recent research from the FCA (Financial Conduct Authority) has found that around 100,000 over 55s withdraw money from their pensions every year without seeking financial advice[1], something the organisation is campaigning hard to change. It’s difficult to imagine that this many people have got to this point without any sound advice.
Recent research from the FCA (Financial Conduct Authority) has found that around 100,000 over 55s withdraw money from their pensions every year without seeking financial advice.
Having a comprehensive financial plan with a clear strategy to deliver to your retirement needs is key to understanding the best way to maximise your pension freedom. A Ferrari may seem a fantastic idea within the first week of your new-found retired lifestyle, but in many cases, your pension pot will have to last for almost as many years as it took to save it and a purchase like this may put too much strain on your pot to meet your needs for the remainder of your lifetime.
Care must also be taken when looking at annuities, although well-advertised as a sensible alternative to withdrawing lump sums of your pension, exchanging your pension pot for a monthly income is irreversible, holds little flexibility and gives little scope to pass on benefits to future generations. With no chance of growth, an annuity won’t earn you any interest and restricts your ability to invest for the future. In fact, since pension freedom was introduced, sales of annuities have tumbled by 80% according to the ABI[2] (Association of British Insurers).
The easiest way to protect your funds and cut through the confusion is to seek expert financial advice – it’s the best way to understand when you can retire with confidence, while also ensuring your assets are structured suitably and invested in a risk-managed strategy designed to maximise potential returns. An adviser will spend time discussing what is important to you in life, your goals and aspirations for the future, and learn about the important things you want to plan for. Creating a clear vision for your retirement is the most solid route to understanding what is possible with the money you’ve saved.
Seeking expert help both throughout our working lives and as we hit retirement age is a sure way to take the dreaded stress and worry off our shoulders when we hit our 60s.
There is hope when it comes to the increasing retirement age – a financial adviser may be able to plug the gap between when you want to retire and when your state pension kicks in, structuring your assets and income to minimise tax payments and help your money go further. In the best case, retirement may be closer than you imagined!
When planning for our futures, ‘what ifs’ still need to be taken seriously and a rainy-day fund is essential. With the NHS in the UK in turmoil and people living way into their 80s and 90s – the cost of private health care, medication, and elderly long-term care must be accounted for within a financial plan.
In 2017/18, Paying For Care found that the average cost of a residential care home in the UK was £32,344 a year, rising to over £44,512 a year when nursing care was included[3]. Just one hour of daily care can total up to £6,700 per year in some parts of the country. State funding rules are constantly changing – currently, if your assets come to a total of £23,250 or more by the time you or your partner need this type of care, you will be expected to cover all care costs yourself, which could leave you short if the right measures aren’t in place. A financial expert can help with things such as equity release, payment schemes, and insurance policies to guarantee your cash flow and take some of the burden if care was needed.
Although financial planning and retirement planning are essentially two separate entities, they must go hand in hand in order to provide the lifestyle you want. Getting down into the granular detail of your finances as you approach retirement is the best way to assess what actions are needed to maximise your assets to last. Seeking expert help both throughout our working lives and as we hit retirement age is a sure way to take the dreaded stress and worry off our shoulders when we hit our 60s.
As we strive to save, invest and grow our assets over the course of our working lives, the transition to withdrawing and living off those funds may seem a terrifying concept. But through solid advice and good decision making, you can guarantee financial freedom throughout your golden years.
About Cowens Financial Architects
Cowens Financial Architects is a trading name of R A Cowen and Partners Financial Services Ltd, part of Cowens Group. The team delivers a range of financial planning services, focused on helping people to make the right financial decisions, including financial planning, investment advice, retirement planning, and inheritance tax planning.
In addition to the financial planning provided by Cowens Financial Architects, the business also provides corporate financial planning through its brand, Cowens Employee Benefits Ltd.
R A Cowen & Partners Financial Services Ltd. Registered office: Inbro House, Commercial Gate, Mansfield NG18 1EU. Authorised and regulated by the Financial Conduct Authority.
[1] https://www.moneysavingexpert.com/news/2019/01/new-rules-to-make-pensions-clearer/
[2] https://www.iress.com/uk/resources/insight-research/retirement-report-retirement-income-and-annuity-perspectives/
[3] https://www.payingforcare.org/how-much-does-care-cost/
To hear about defined benefit transfers and pensions in the UK, Finance Monthly connected with Chartered Financial Planner and Chartered Wealth Manager Pierre Coussey. With over 30 years of experience in financial services both within the largest providers in the UK and at the coal face within private practice, Pierre is also the current Chairman of the Personal Finance Society (Kent region) and is a past Examination panel member of the Chartered Institute of Securities and Investment (CISI).
What are the typical challenges that clients approach you and Bond Wealth with in relation to transferring their defined benefit pension?
Pension freedoms, which came into effect in the UK back in 2015, introduced the ability for those with defined contribution pension arrangements to access their pensions without the need to buy annuities and also pass their pension funds onto family. The biggest headline was probably giving them a choice to buy a Lamborghini if they choose to do so. This did not cater for the 5.1 million people in the UK who held old benefits in an ex-employer or closed defined benefit scheme (pensions that promised an income for life). One of the things we have seen is a massive demand for pension transfer advice and this is partly being driven by some of these factors, together with historically very high transfer values in terms of multiples of deferred pension promise (with 30 to 40 times being quite common).
The complexities of what is best for a client are amongst the most challenging and are often not fully understood by potential clients. Our general view is that for the majority of people, sticking with the defined benefits will be correct unless they can fully take into account wider factors and understand them. Thus, a starting question would be “why would they want to give up a guaranteed pension for life?”.
What would you change about defined pension schemes, if you could?
As a pension pot needs to meet a number of needs, it is frustrating that in the main partial transfers from the existing defined benefit schemes are not facilitated. If I could have a panacea, this would be available to all, so that a mixed approach could be customised specific to a client’s actual needs rather that the current all-or-nothing transfer choice. Unfortunately, I do not see this changing as existing schemes have no appetite to spend on this flexibility for past members and are inundated with transfer value requests.
What is your overall piece of advice for Finance Monthly’s readers in regards to defined benefit schemes?
My overall piece of advice regarding defined benefit schemes is to start with the assumption that your existing pension arrangement will be best in providing for you and your family and then write down your three main reasons for considering or wishing to transfer and the three main drivers in your retirement planning. The bigger the lifestyle cost this needs to support, the bigger the value and risk transference you are putting into your own lifestyle bucket.
Additionally, talk to an experienced regulated adviser who can initially help you explore your real lifestyle needs. This should be followed by further working with them to explore your actual retirement needs that will fit with your lifestyle in the future. Ultimately, if they can save you from potential mistakes at either of these stages, the cost of good advice will be small compared to what would be at risk of getting it wrong. If you transfer out of a defined benefit scheme, you cannot reverse that decision and transfer back.
Ultimately, your chosen regulated adviser can take you through these initial steps at a relatively low cost. It is essential to bear in mind the merits or drawbacks that may appear with the transfer, but might not become clear until several years down the line. One example of this is that a client is probably not going to run out of money in the first year. The risk of this however could increase in the following 10-15 years, if they, for example, decide to spend all of their money on the aforementioned Lamborghini.
Contact details:
Telephone: 01892506891; 0203 096 3385
Email: pc@bondwealth.co.uk
Far from taking human jobs in future, Artificial Intelligence (AI) and Machine Learning (ML) technologies are going to free up finance professionals from spending too much time on monotonous tasks and allow them to focus on more strategic tasks of higher value to the business. Does this mean that finance roles will mostly be driven by robots? Below Tim Wakeford, VP of financials product strategy EMEA at Workday, discusses with Finance Monthly.
A recent EY study revealed that the majority (65%) of finance leaders said that having standardised and automated processes—with agility and quality built into those processes—was a significant priority when it came to investing in emerging AI and other technologies. And, following on from this, 67% of finance leaders said that improving the relationship between finance and the wider business strategy was also a key priority.
Again, this is an area where automation and AI technologies are helping free up time for finance to spend more time working with other teams within the business. This enables them to figure out where to go next as opposed to looking backwards and dealing with unproductive and time-consuming legacy finance systems.
Freeing up talent to focus on high-value tasks
Freeing people up from repetitive jobs to enable them to focus on high-value tasks is the opposite of the oft-cited “robots putting people out of work” narrative.
Indeed, automation is a huge opportunity to reduce the unnecessary burden and pressure that’s put on finance professionals, particularly around traditional tasks such as transaction processing, and audit and compliance.
The adoption of AI applications within finance enables forward-thinking executives to move info far more strategic business advisory roles. This means that they can focus less on number crunching and more on financial analytics and forecasting, strategic risk and resilience, and compliance and control. This shift to data-driven financial management delivers a much wider benefit across the business.
The Rise of the robots: AI in finance
Computer systems performing tasks that previously required human intelligence is the definition of AI, with experts viewing AI and automation as viable solutions to efficiently deal with compliance and risk challenges across different sectors.
With the rise of the ‘big data’ era comes a parallel growth in the need to analyse data for financial executives to be able to properly manage compliance and risk.
This is another reason why finance teams cannot ignore the opportunities that embracing AI technologies offers them. It allows them to process vast amounts of data faster and easier than large teams of humans can.
Individuals are then able to make better strategic decisions based on the information that AI is able to rapidly extract from what were previously time-consuming and repetitive and monotonous tasks such as transaction processing.
Jobs least likely to go to robots
Forward-thinking and highly-skilled financial executives are happily embracing AI, as they see the clear opportunity it presents to play a more valuable and strategic role within their organisation.
“The challenge for managers will be to identify where automation could transform their organisations, and then figure out where to unlock value, given the cost of replacing human labour with machines and the complexity of adapting business processes to a changed workplace.” This is how writers James Manyika, Michael Chui and Mehdi Miremadi so fittingly describe the process in their book These Are the Jobs Least Likely to Go to Robots.
“Most benefits may come not from reducing labour costs but from raising productivity through fewer errors, higher output, and improved quality, safety, and speed.”
AI and automation in finance has to be about reducing repetitive manual tasks and raising overall productivity through data-driven business strategy. The bottom line is this: any technology that can reduce manual input and the associated human errors for transaction processing and governance, risk, and control (GRC) will free up finance professionals for more strategic work.
Any organisation’s most important asset is its people. And finding out which emergent AI technologies and applications are the best for a business and its people is going to be key for the future of finance.
Giving skilled finance staff the autonomy and opportunity to move into far more strategic data interpretation roles and letting the machines take on the grunt work is a necessary shift in the finance function.
As well as automating a large part of the finance function, AI technology will also help skilled finance executives to make a far more sophisticated analysis of complex data sets and to provide genuinely valuable insight to drive the business forward.
There is very little doubt that the future of finance will be one that embraces technological innovations to improve effectiveness, increase efficiency, and enhance insight.
Gary Scheer is the Founder and Managing Member of New Jersey-based Gary Scheer LLC, Complete Financial and Retirement Planning. His company’s unique process enables their clients to enjoy a bigger future through a comprehensive, holistic approach. By implementing creative financial and legal strategies, Gary and his team help them protect, preserve and pass on their wealth to have a big impact on their family, friends, and the causes they care most about. This month, Finance Monthy had the opportunity to speak to Gary and learn more about the retirement solutions that his company provides.
How should individuals in the US plan for early retirement? What options are available above and beyond a pension?
Retirement planning in the US is like having a three-legged stool. The first leg is a pension, the second leg is Social Security, and the third leg is one’s personal savings. Unlike during our parents’ working years, today most Americans do not have a pension plan. They may have employer-based programmes, such as 401(k) and 403(b) plans and brokerage accounts that they have used to accumulate money. However, these accounts may be very volatile and offer few, if any options to provide a guaranteed income for life. One of our tasks is to help people create predictable, guaranteed streams of income to supplement their social security and pension pay-outs. We utilise various financial and legal tools to make this happen. In addition, we’ll employ certain creative financial strategies to optimise the non-guaranteed portion of our clients’ portfolios to keep up with inflation and protect them from the potentially devastating costs of unreimbursed medical and long-term care expenses.
What would you say are the most common retirement plans that clients in New York and New Jersey look for?
New York and New Jersey are two of the most expensive states in the US in which to retire.This may become more apparent over time, due to the recent passage of the Tax Cuts and Jobs Act. This will limit the tax deductibility of state and local taxes, commencing 1 January 2018. Most Americans were taught that they should put as much money as they could into Tax Deferred accounts such as IRAs, 401(k) and 403(b) plans. Doing so enabled those to take a tax deduction in the year the investments were made. The money in the accounts was not taxed during the growth years and would only be taxable when the account holder retired and presumably dropped into a lower tax bracket. Many of our clients are shocked to learn that they are in the same or higher tax bracket in retirement than they were during their working years. Between having no more dependent children, little if any tax deductible mortgage interest, and no more tax deductible retirement plan contributions, nearly all of an average retirees’ income is taxable. In addition, investors who contributed to IRAs and employer-based retirement plans during their working years are forced to begin withdrawing from these accounts after turning 70½ through government mandated Required Minimum Distributions (RMDs) whether they need the income or not. Another surprise for many retirees is that their social security income may be taxed. Individuals earning $25,000-$34,000 per year in retirement may be taxed on up to 50% of their social security income. Those with incomes in excess of $34,000 may be taxed on up to 85% of their social security income. For married couples filing joint tax returns, the figures are $32,000-$44,000 and above $44,000 respectively.
What are the most common challenges that people in America face in regards to preparing for a retirement?
There are many risks and challenges that Americans face as they to people living much longer than company actuaries projected. As a result, due to longer life expectancies, those fortunate enough to have a pension are at risk that their former employer, whether a private company or government agency, may not be financially solvent to continue making their promised payments in the future. This may put extra stress on one’s personal savings in order to protect them in the event of potential pension fallout. In addition, since people are living so long, they run the risk of having many years of unreimbursed health to prepare to pay for retirement. One of the biggest and long term care expenses in retirement. This is known as the 'Longevity Risk'. By helping our clients take Longevity Risk ‘off the table’, all of the other risks that retirees must deal with such as stock market risk, interest rate risk, sequence of return risk, liquidity risk and legislative risk will rarely become an issue as people age.
What attracted you to this field? How challenging is it to work in an ever-changing regulatory environment?
In the early stages of my career, I worked primarily with middle management executives and small business owners in connection with their employee benefits, risk management and retirement planning. Then in 2000, a tragic event in my wife’s family changed the focus of my practice to retirement and estate planning. My wife’s grandmother was a frugal but loving woman who worked hard to provide for her three daughters. She owned a knitting store for over 50 years and had built an estate worth nearly half a million dollars. After her death in 2000, the family learned that the estate was nearly bankrupt and all that remained were several small pieces of jewelry which were fought over by the sisters. “How could this happen”, I said to myself; “Where did all the money go?” The answer - in 1994 my wife’s grandmother broke her hip and after a successful hip replacement surgery, went into a rehab/nursing home for 45 days of post operative care. She had one daughter living with her at the time who decided to keep her mother in the nursing home for 6 years at a cost of nearly $400,000! I was shocked and saddened no one had consulted a financial planner to look at alternatives to nursing homes and implement strategies to protect the estate of a woman who worked so hard to build her legacy. This stirred a passion in me to help other families and people near retirement age to protect the wealth they have worked so hard to accumulate. Since then, the financial services profession has become one of the most highly regulated fields in our country. In 2016, the Obama Administration issued new Department of Labor (DOL) Rules mandating that financial professionals offering financial advice involving retirement assets operate as Fiduciaries and "act in their client’s best interests". While one would hope their adviser will recommend products and services that are in a client’s best interests and not merely what is suitable’, when the government gets involved and mandates what private companies should and shouldn’t do, compliance expenses commonly rise dramatically and cause advisers to stop working for smaller clients, the ones who were supposed to benefit from such legislation. Currently, the Trump Administration has put some of the more onerous requirements of the DOL Ruling on hold for further investigation.
How has retirement planning in the US changed in the past 35 years?
In the early 80s, IRAs and 401(k) plans were relatively new. People typically worked for one company for their entire careers, retired with a pension; and along with Social Security, had enough money to enjoy a retirement with few, if any, financial worries. Since then, most private US employers have disbanded their pension plans and offer Defined Contribution Plans such as 401(k)s that require employees to fund a large percentage of their retirement nest eggs. These plan participants have been forced to become their own pension and retirement plan managers with minimal education, training and experience and a limited selection of funding options for what for many is their greatest single financial asset. According to the Society of Actuaries, if a couple is married, there's a 72% chance that one of them will live to age 85 and a 45% chance that one will live to age 90. As a result, having a plan to cover health-related expenses and not run out of money is more critical than ever before.
What is the single most important piece of advice in regards to retirement you would offer to American people?
It is a lot more challenging to plan and implement how to manage one’s assets in the distribution phase of their investment life than during the accumulation stage. This is not a do-it-yourself proposition. Hire a Fiduciary Financial Adviser who specializes in retirement distribution planning to put the odds of success in your favour.
Website: http://garyscheer.com
