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05/07/2010 | |
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Written by Mike Morrison, Head of Pensions Development, May 2010 This information is directed at professional financial advisers only. It should not be distributed to, or relied upon, by retail customers. David was seeing Alex today, an old friend who had also been a client for a number of years. The difference was that Alex had phoned him to arrange the meeting and had sounded as if he was in a bit of a panic. Alex ran a number of HiFi shops, he had expanded from two to six several years ago but had had to sell three of them in the last year due to the economic climate. He was married for the second time with two young children aged 11 and 13. Alex came into the meeting room and placed a large cardboard box on the table between them. “Hello David, I think I need your help.” He shook hands with David and continued. “I have been seeing a lot in the press about babyboomers and how they are all coming up for retirement in the next few years and it has only just clicked – I am one of these babyboomers. I will be 50 later this year and I have suddenly realised that I really haven’t thought about my retirement. So, firstly, should I start thinking about it?” “It’s never too early to start planning,” smiled David. “I always thought you had a ‘big plan’ for what you are going to do and that is why we have never really had to sit down and look at a formal retirement plan. You have always told me that you do not believe in pensions!” “I know and I am still not sure,” replied Alex. “I always thought that I would not need one – my house and my business would see me through, but now I am not so sure. Business has been tough over the last couple of years and has really undone all my expansion plans of the previous five years. If I am honest, I am back to where I was six or seven years ago. Apart from the house, which I think is the best investment I have ever made. “Ah, the house,” smiled David. “What do you want to do with that at retirement?” “Well, Lucy and I thought that we could downsize a bit. Hopefully the kids will be at college and we could move to a small house by the sea or even across the Channel in France.” David replied: “I think that we need to sit down formally and put together a proper plan. I need to involve Lucy and we need to have a candid discussion about your future plans and your current resources. Do you have any pension plans at all?” Alex thought for a while. “Well I did work for a big electronics company for fifteen years or so after I left university, I was in their pension scheme, I think it was a final salary scheme. I’ve done nothing with it and just left it alone.” David smiled to himself. He had read somewhere recently that we were still in the golden age of pensions, but only just, and that clients of a certain age were still likely to have some pension legacy from employment earlier in their career. “A few thoughts Alex,” continued David, “so we can have a meaningful discussion in the future. Downsizing is great in theory but I have a couple of thoughts for you. Often, the desirable areas to downsize to are more expensive than average, either in this country or abroad, so you might not have much to use. “Secondly, if you are right and you release some equity, consider how much and how this can be used to produce an income. One of the pension providers recently did some research and concluded that on average downsizing could produce something like £43.50 per week* . Now, I know that this is just one piece of research but it gives us an indication of what you can achieve. “I am pleased that you still have the deferred final salary pension scheme – it might not be much but we can definitely have a look at the current value and use it to build on.” Alex agreed that although he had pretty much forgotten about that pension, it would all help towards his retirement plans. David continued: “Although business has been hard, I know that you are still earning a decent amount and we really ought to start considering some pension contributions. Currently, you will not be caught by the restriction of tax relief for higher earners and so you will get 40% tax relief on the contributions that you make. I think you should do this while you can, there might not be a guarantee of this in the future. “We will need to look at your debt and your other savings, including any ISAs, and the age that you think that you want to stop working, and whether you need to phase into retirement. “Finally, I want to talk to you and Lucy about investment and your attitude to risk. As we are working with your savings and the end result is likely to depend on your investment strategy, I would like to understand your tolerance to loss”. Half an hour later there was a meeting in the diary and David was back at his desk, generally feeing pretty good. He had been reading a lot of research about how babyboomers were unprepared and under resourced for their retirement – with Alex hopefully there was time to improve the resources and to implement a financial plan. Mike Morrison, head of pensions development, AXA Wealth * Standard Life April 2010 |
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