‘Mind the Gap’ is a phrase that is often seen and heard on the London Underground. A rigid railway carriage cannot align itself with a curved platform often leaving a gap between the carriage doors and the platform.
For those who are the wealthiest in retirement, which does not necessarily mean they were the wealthiest whilst working, the adviser’s role is to help them get the best from their pension savings. The wealthiest in retirement will probably have a significant guaranteed income stream from a defined benefit pension scheme. Someone who receives £20k a year from a defined benefit pension scheme will be among the higher pension income brackets.
Move down the retirement income spectrum and life becomes more complicated. Is it easy to move from an income of £56k a year (twice the national average wage) and then live off £12k a year in retirement? £12k derives from a state pension and a pension pot of around £100,000, (more than twice the average defined contribution pension pot).
What if that person has a mortgage with £50,000 still outstanding? Should they be talking to a retirement income specialist, a mortgage specialist or an equity release specialist? Who is going to give them the best advice on how to manage their finances in retirement?
I suspect it won’t be long into retirement before the above individual decides they have to call upon their housing wealth to help finance their retirement. Will they downsize, will they look at equity release? Is the adviser able to guide them through the pros and cons of both so they arrive at the best solution for them and their families?
Many in what I call the mass retirement income market will have complex retirement income situations. Managing pension income alongside utilisation of housing wealth and reducing mortgage outgoings takes in a number of advice specialists. As in other professions only a very few are capable of practising and keeping up to date across a whole range of specialist areas.
However this is the very help the majority of the mass retirement income market require if they are to have the retirement they deserve. Mind the gap. How well equipped are advisers to identify solutions and needs outside their own specialist areas?
Introducing clients to specialists has come under the regulator’s microscope as a result of transfers from defined benefit pension schemes. Given these are the adviser’s clients being referred, should the adviser carry out due diligence on those who they refer to? Would the adviser use that specialist in a personal capacity? Does the adviser have sufficient knowledge to understand whether the specialist has good processes in place? Where can the adviser get the knowledge that will enable them to conduct that due diligence? In that respect, a look at what the Later Life Academy has to offer would not be a waste of time.
Another gap that regulators are looking at more closely is whether customers understand what it is they are being told. At last people are coming round to understanding that less is more when it comes to communication.
Take this example: like it or not much of what we do involves mathematics. Often I have heard people in our industry say the public at large do not understand basic maths. However, I tend to disagree – the majority of the population can understand basic maths. They do their shopping, they pay their bills, they play games such as darts, they know what are good and bad odds at the betting shop and more importantly know what their winnings are. We can close one of the gaps by relating what is going on with the numbers we are discussing to the basic maths they use in their everyday lives.
For instance, much of what we do is driven by compound interest. Outside finance in what other occupations is compound interest commonly used? Two acquaintances of mine are a stair case designer and a pump engineer. The maths they use in their occupations is baffling until they explain in layman’s terms stress forces and flows and how they fit into the formulae they regularly use.
When it comes to compound interest our clients do not have to understand the various formulae and be able to construct Excel spreadsheets. They need to understand what is happening and its impact on numbers that are important to them. When it comes to inflation, for example, I have seen examples using bread and milk. These are such low-ticket items they are meaningless especially when the person you are talking to may try to avoid going into food shops. We should provide better examples such as the cost of a full tank of petrol. What does it cost now, 50? If inflation continues at 3% for 20 years, that tank of petrol will cost £90 in 20 years and £120 in 30 years. It is possible to do the same with household energy bills.
If you can choose an item that is a significant outgoing, in the news and relate inflation and other matters that involve compound interest, to that then it’s more likely the message will be understood and more importantly remembered.
There are lots of gaps that need avoiding in our industry. I have mentioned only two, but most can be closed with a little creative thinking.
Bob Champion is chairman of the Later Life Academy (LLA)