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Peter is a Corporate Director and Chartered Financial Planner with Fairstone Wealth Management.
His career in financial services began in 1998 when he worked for Standard Life, primarily within their group pension department. Peter then took up a post with Barclays in their wealth management division based in London, before moving to Belfast.
Peter specialises in the Pre & Post Retirement planning and was the 2017 Money Management ‘Retirement Planner of the Year’.
If they are retiring, I always like to sit with husband and wife, both together.
I ask if there are any special holidays they want to take, any gifts they want to make? We talk about how important it is to leave some of the assets behind, we talk about their house and if they might downsize at any time, about potential inheritances that might come in, and their general views on investment risk.
I ask about anything that can help me build an idea of what their retirement may look like and what they want; the more information they can give me the more accurate the picture I can then build.
Do they want more money in early years? Why? Is it because they’re active and want to travel so
want to make the most of the fun years? Do they need a fixed guaranteed income?
I always talk about looking at their own parents as well, what was your impression of their retirement, what did they like and what they didn’t like, did or didn’t do.
As much information I can get about their perception of retirement, any experiences they’ve seen, what they want to do, levels of income, what they would like, what they need.
I differentiate between two amounts; what they’d like rather than what they’d need. I’ll say, ‘Don’t tell me what you think you can survive on, tell me what your ideal amount is.’ Then we can move things up or down.
“If they are retiring, I always like to sit with husband and wife, both together.
I need to know when the other partner plans to retire, whether they’re going to fully retire or just reduce their hours”
Generally, the ones that you have to probe to open up a bit more can be difficult, so the ‘Don’t knows’. With them, we have to almost walk them backwards and almost ‘play out’ the retirement years with them, paint that picture in their head to get them to try and think.
I might say, ‘Let’s say you’re retiring today, your income has stopped, you tell me what you need’. What about the kids? If mum and dad are retiring, does that mean there will be weddings to pay towards? These questions start their thought process snowballing.
The more frustrating ones are those you have to work on a bit more to get the answers out of them, then I put a bit more effort into that first meeting, while the ones that do articulate it a bit more just make it much easier in the second meeting.
We start by looking first, at what the client wants as income and second, what their plans are for the capital or pot. We look at how to best fund this plan. It could be covering their outgoings with a fixed annuity or a combination of fixed guaranteed income and flexible access drawdown. This will depend on the client, what they require and of course their appetite for risk. If they want to sustain a particular plan, we can set it up to make sure the plans are stable, or is there going to be capital erosion on that plan through the use of flexible access drawdown because part of the funding is using the pot?
There will be other cases if the client has flexible access drawdown, they want the pot passed on, so they want to keep their initial capital or principal amount, which is a different conversation because you want to make sure that stays around.
With respect to clients that are suitable for flexible access drawdown, rarely will I have a conversation around a ‘safe withdrawal rate’ with a client because they understand, ‘I built this up, now this pot is to give me what I want through the rest of my retirement, how is it going to do that, this is what I want’.
There could be larger returns at the start, lump sums taken out because of what these clients need, then the withdrawals after that give the pot an opportunity to recover. So, it’s more about looking at the cashflow rather than a 4% rule, or anything like that.
As financial planners, my opinion is there is no one-size-fits-all, every client is different. It’s my job to look at their details and objectives and see how we can fit that in and use the building blocks of annuities, fixed and temporary and flexible access drawdown. Part of flexible access drawdown can be used part of the drawdown to buy a temporary annuity for certain years, until X income comes in, so it’s just what we need to do to try and secure that retirement plan as closely as possible rather than a safe level of withdrawal, as such.
I ask about their parents; when their parents passed away. It tends to come in as part of them telling me of their experience of mum and dad’s retirements that opens up, ‘Dad didn’t live too long’ or ‘Mum lived to 102’ so you get that kind of information from them.
Then we talk about themselves and what they think will happen. I always say ‘statistically’, because even with a history of their parents not living long, if a client reaches their 60s, their average life expectancy has already increased.
In the UK, if the average is 77 or so, that is taking into consideration all the people that passed away early. You’ve got through the 50 to 60 years, which can be dangerous to people. I say, ‘now you’re in your 60s your life expectancy is up to about 85 or 87’. I say, ’statistically, there’s a one in four chance that one of you is going to hit 90, so we need to know to assume the new averages. We can’t just keep going ‘Mum and Dad lived until 72 so I don’t think I’ll live any longer than that’. You’re already beyond that.
With the decumulation aspect of it we have to make them very aware of volatility levels of risk. When we do the projections, we’ll assume different growth rates, so if a client comes out as a seven out of 10, I’ll talk about what that looks like and I’ll show them examples.
Then we’ll talk about the projections that we’re assuming are less than that, so do we need to take the level of risk that you’re coming out with? What’s your ultimate goal here? Do we need as much volatility as that, perhaps five out of 10 would be more than enough to enable this plan and a bit more? It’s balancing all that out.
It’s a slightly different conversation with the accumulators. Here, many still have this preconceived idea that, ‘you’ve got to de-risk now you’re into retirement’, when actually for flexible access drawdown they need to remain invested and still seek returns. At 60, they could be invested for another 20 years, which is maybe as long as they’ve been accumulating.
That tends to open things up, gets them to realise, ‘I’m not retired so I’ve not got to de-risk completely’.
As the years go on, for anyone in flexible access drawdown, their confidence levels or understanding of the markets can encourage them to take a little bit more risk. Perhaps if they’ve done particularly well and are getting a little older, it’s almost let’s conserve what we’ve got a little bit more and derisk that down because it’s done so well, so it just depends on the individual.
“many still have this preconceived idea that, ‘you’ve got to de-risk now you’re into retirement’, when actually they need to remain invested and still seek returns. At 60, they could be invested for another 20 years, which is maybe as long as they’ve been accumulating.”
For clients that flexible access drawdown is suitable for, I talk about the sustainability of the pot because ultimately, if the pot runs out either you’re overspending or we haven’t assessed it accurately enough.
I talk about their plan, their building blocks, which may be more than just their pension. It could be a buy-to-let income, two state pensions coming in, a fixed annuity and it’s using all that to make sure the plan is sustainable for the rest of their life.
We’ll look at the assumed withdrawals over the years, expected capital erosion in the first 10 years because we’re taking more income than would be generated from that, but that’s going to reduce at these two ages because we’ve got two state pensions. Their income needs will likely drop at 75 because they remember Mum and Dad being less active and probably needing less, which all combines to give the pot a chance to recover.
If we’re taking too much, that pot will disappear or go very close, which is not a good margin for error in this projection. Seeing a nice pot still there at the end, even after withdrawals, gives us a bit more margin for error.
For large amounts I generally use model portfolios, maybe looking at income. If it’s in the early years of drawdown, if they’re likely going to take a bit more income and there’s going to be capital erosion, it can also include growth models.
Depending on the client’s needs, we could have a lower-risk element that might build in cash to start off with and have a higher-risk one for the longer term.
The big thing is to be able to review it effectively and be able to benchmark against where you should be, and if anything does change be able to amend the projections and see how that plays out.
I always say to clients, there’s no point in changing something now and then in five years’ time saying, ‘We shouldn’t have done that’ or ‘We should have taken less’ or whatever. By reviewing it, we can see how it plays out in the future and affects your investment pot.
With clients in drawdown, we always try and use the portfolios that we have; to keep their same risk profile irrespective of market conditions. So, if they’re a five, they’ll always be a five, etc.
Clients are increasingly asking, ‘What’s in that portfolio, I don’t like that or don’t like this’. Or, I’ll talk to them about their plans, and it might come out that their plans look very socially responsible, so I might drill in deeper, ‘tell me about this part of your retirement; it appears you prefer stay-at-home staycations’, for instance. I can then describe the solution that’s becoming more popular and explain the story behind it.
Generally, clients buy into that story because they feel they’re hitting two aspects; doing something considered ‘good’ but also hopefully making a bit of money that will help my retirement and it makes me feel a bit better. Clients are looking at having at least part of their portfolio leaning that way, if not the whole.
At least once a year, we’ll sit down and do a full review, which is the same with clients in accumulation. There’s more detail in the post retirement review especially with clients in drawdown, because we have that particular plan that we’re benchmarking against, there may be changes.
In accumulation, if it’s going well, we could add more into it, but there’s a bit more to do with drawdown in terms of making sure everything still works, is comfortable, and that if there’s been a fall in the market everything is still okay; you’re still above the line. It’s not always about the investment return, but about where we are against their plan.
I would also say to my drawdown clients, you’ve access to me throughout the year, we will do one sit-down ‘official’ review but if you need to have a chat about anything or you want to come in, talk about it. If they come to me saying, ‘I was talking about giving my son £10,000 this year’, we can look at things like that on an ad hoc basis.
For drawdown clients, if it’s a lower risk assumption, it is actual returns from a certain sector over the last 20 or 30 years. That will take in every stock market upturn and drawdown that there’s been. But then the system can also add in additional drawdowns that maybe didn’t happen just to add a bit more of a stress test than just what actually happened. That helps give an idea of how much margin for error there is.
First of all, I will try to gauge their understanding and experience of investing. Then I’ll talk about their attitude to risk and where it comes out and I’ll start trying to relate that to what that means in real terms and in terms of ups and downs and drawdowns.
I’ll then sit with the client, look at different portfolios – might look at a four, five and six – and say, ‘when there was a crash there, this is how that felt’ I’ll compare against a couple of market indices to show the client’s drawdown might not necessarily be the same as theirs.
My job is to try to give them as much information so they are aware of what it could look like, what risk actually means against that particular number, so they are better informed and then if anything does happen, they understand and don’t panic.
“My job is to try to give them as much information so they are aware of what it could look like, what risk actually means against that particular number, so they are better informed and then if anything does happen, they understand and don’t panic.”
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