If the client already had a retirement income figure in mind, say £15,000, it would be clear to them what kind of pot they’d need (approximately £415,000) to achieve this goal based on today’s prices. Any gap between their estimated pot size and the amount actually required to have this level of income would naturally lead to discussions around either putting more money to work or getting current contributions to work harder.
2. As a portfolio planning tool
For this it can be useful to ‘map’ different multi-asset funds to different growth needs. Multi-asset funds have a number of benefits that make them ideal for retirement saving: they are typically lower-risk growth than equities; they aim to reduce volatility; they are often actively managed, which can give savers some peace of mind; and because they were conceived as retirement products, they are often built in an extremely cost-conscious way.
Using multi-asset funds at the core of a retirement portfolio can give clients a reference point against which to understand more tactical portfolio allocation. If someone has a 60 per cent core weighting to multi asset, a tactical allocation to assets with a punchier risk/return profile will probably be more palatable.
There are also different blends of multi asset, some with clear references to how much equity risk is being taken. Using these again provides a clear and simple reference point for clients that their core holding is clear and consistent but the risk exposure may need to be dialled up from, say, a 60:40 exposure to equities and bonds to an 80:20 fund which is going for more growth.
Interest rates have been reduced further in the aftermath of Brexit. With the Bank of England lowering rates and long-term bond yields beaten even further down, retirement has become even more expensive to fund.
The tool might show that it needs £27.75 to buy £1 of annual retirement income.
But as recently as last year, £1 of retirement income would have cost just £19.46. In other words, today’s cost is around 40 per cent higher than nine months ago. The spike post-Brexit shows that this has played a part, according to CoRI figures accurate as of 12 September 2016.
So while someone who looked only at markets might think that Brexit had no effect, or a positive one, on their portfolio, our analysis shows that the vote to leave the European Union has actually had a significant impact on the cost of future retirement income. Therefore, this is more about keeping a reality check on whether they are making enough contributions – as they draw closer to retirement – and have a clear picture of what kind of income they could expect if they annuitised. Coupled with an intelligent conversation around drawdown options, this can provide the backdrop to a more productive evaluation of retirement income options.
