For all the talk of tax, longevity, inflation and investment returns, the technicalities of retirement planning are of secondary importance.
In this article , I put these technical issues in a broader perspective. If we are to have sponsored financial education in this country, it needs to concentrate on what really matters to ordinary people, not what matters to us as pension technicians.
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The first thing about yourself you should know
Know what you get from the State!
The first big asset all of us will own at retirement is our right to the basic state pension, estimated to have a market value of £175,000 when paid in full. Amazingly, few of us have a clue whether we’ll get the full state pension and what we can do to top up to the maximum.
But Government promise you to answer these questions if you take the trouble to fill out a BR19 which you can do online. The link is here.
https://www.gov.uk/government/publications/application-for-a-state-pension-statement
The second thing about yourself you should know
Know what you can get from your house!
The second big asset most of us will have in retirement is the equity in property. You may not be able to buy a sausage with a brick- but you can release income from property either by selling it or by mortgaging it using something called equity release.
The attitude we have to our property is complicated by issues around inheritance and the emotional attachment we may have to the house, the area and the lifestyle we have become used to.
It’s easy enough to know what your house is worth if you sell it- it’s very hard to work out how you can realise this money.
The third thing about yourself you should know
Know what you can get from working!
The third big asset we all have (though we may be reluctant to use it) is our ability to work. Most people do some work in retirement. For many of us, work is a retirement no-no, for many others it is a hobby and for some it is a necessity.
Before we even start thinking about complex things like annuities and income drawdown, we have to think through how secure we feel about the future and whether we can trust our big assets. There may be other assets we can fall back on- a business, investments and bequests, all of these need to be factored into our thinking.
This is more about emotional than financial intelligence
It’s only after we have worked through these questions (many of which need more emotional than financial intelligence) that we should start thinking about pension income.
Income we have from employers schemes (guaranteed by the employer) is easy enough to understand (even if it’s not easy to remember who you’re owed money from).
Savings built up in non-guaranteed schemes (known as DC) are not so easy to understand as income. These are the savings that you will have to make decisions about; decisions on whether to buy a guaranteed income (annuity) or a non-guaranteed income (drawdown) or pay some tax and have the money sitting in your bank account.
But let’s put all this in perspective. For most people, the savings they have in DC is unlikely to be their big deal. All the stuff around the State Pension, Housing, Work and other investments all come first in our consideration.
Which is why it is so important that people start thinking about what retirement will be like for them before taking decisions.
How we can help people better understand these things
Emotional intelligence is more about feelings than facts. And knowing how we feel is something we get better at as we get more experienced. Setting aside the time to talk through these things with ourselves and partners is a really tricky thing to do.
Almost certainly some of the questions we must ask will be uncomfortable both in the asking and in the answering.
The Guidance Guarantee at retirement will be a great help
By comparison, doing the Maths is quite easy. Which is why I think the Guidance Guarantee is such a good idea. Giving people a quick session that deals with the maths around the DC options is not going to do much in itself. But this meeting is the focal point that enables the big picture items to be properly understood.
I think we’ve got to do some reassessment of how we think about our retirement planning, the financials cannot drive everything, we have to start with what we want and to do that we have to know ourselves. These basic life skills cannot be taught, but we can help people frame their thinking by giving them some help.
What we do at First Actuarial
Increasingly in our work at First Actuarial, we are understanding these different perspectives and recognising the importance of emotional intelligence in this complex area of planning.
We organise financial education sessions at people’s places of work; our customers are employers who think these sessions are worth paying for.
If you would like to discuss how we go about this and how this might help your organisation in talking to its staff, please contact me at henry.h.tapper@firstactuarial.co.uk or my colleagues Peter Shellswell or David Joy who have the same @firstactuarial.co.uk protocols.
