Why retirement income isn’t just about pensions anymore

5 min read 28 Feb 20

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When statistics hit home

There’s nothing more powerful than a dramatic statistic to grab people’s attention. Especially if the statistic has the potential to change the way those people run their businesses.

This was exactly the scenario when former Pensions Minister and Royal London Policy Director Sir Steve Webb addressed an audience of financial planners and advisers.

The statistic in question was that in the next decade, £1 trillion of wealth will be inherited. This isn’t theoretical, it’s happening now.

“Something dramatic is happening. In the next decade, £1 trillion of wealth will be inherited.”

The question is, do we understand the nature of this wealth and who the inheritors are? And, do we fully understand the possible impact on – and advice needs of - clients, and the consequences for advice models?

The inheritance opportunity

The reality is, there’s no single answer; when it comes to wealth transfer, it’s impossible to take a cookie-cutter approach to advising clients, because inevitably, it involves families. And as we know, families are complex.

The audience had gathered to discuss and debate how to help clients plan for a sustainable income in retirement. The insight Sir Steve shared left us in no doubt, that it’s no longer just about pensions. The interplay between socio-economic and political factors has resulted in complexity – but also great opportunity for advisers to add value.

The first thing to consider in the context of inheritance is that the gap between generations is typically 30 years. So, inheritors are in their 60s – roughly the age of many advisers’ clients.

The second point is that generally, the 90 year olds passing on their wealth are home-owners, which means it’s housing wealth that’s flowing down the generations.

“A growing proportion of wealth at retirement is property wealth, not pension wealth.”

Both of these points are significant.

It’s a lottery - asking the right questions

A key question for advisers to ask their 60-year-old clients is, do you have any siblings? There’s a big difference between inheriting all or just some of a property worth £0.5m. A client or couple’s inheritance can be a lottery that depends on their family situation.

Another area to probe is what the older generation plan to do with their wealth. We may assume they’ll pass it to their grandchildren or children. The reality is, some give a lump sum to children or grandchildren (in their 20s or 30s) while they’re still alive – perhaps to help with a defined purchase. But on death, they’re more likely to pass on any wealth to their spouse.

So, another question to ask is, who will the final partner give to? Most of the meaningful money is flowing to the 60 year olds, but each family situation will be different.

Will property wealth compensate for the decline in DB pension?

With £1 trillion of (largely) housing wealth flowing to 60 year olds, does this mean the ‘pension crisis’ has been over-exaggerated?

Unfortunately, the answer is most likely not. In fact, Sir Steve revealed that housing wealth could actually reinforce the issue. That’s because housing wealth generally correlates with pension wealth, meaning it doesn’t necessarily sit with – or flow to – those experiencing the biggest gap in retirement savings.

Of course, there are always exceptions; one cohort that doesn’t necessarily fit this scenario are people who bought their council houses in the 1980s. They could be set to retire with a chunk of housing wealth, but relatively low pensions wealth.

So, isn’t releasing the equity in property the answer –whether that’s via an equity release product or through downsizing?

Again, the evidence doesn’t really support this. Equity release isn’t a mainstream product for most advisers and generally, people aren’t releasing equity by downsizing. If they do sell their home, it’s more likely to be to solve a housing or lifestyle issue.

What will policy makers do next?

We know that government isn’t averse to intervening when it sees a ticking socio-economic time bomb on the horizon (think, auto enrolment and pension freedoms).

So what about intergenerational wealth inequality? Are there likely to be any incentives for the older generation to bypass their 60 year old children and gift wealth to their millennial grandchildren? Especially when we consider that the ‘children’ are themselves more likely to have housing wealth and at least some form of guaranteed pension.

We don’t have a crystal ball, but it’s a possibility (albeit against the backdrop of highly valuable IHT revenues for government!)

So what does all this mean for later life advice?

One thing to ponder is whether going forward it will be possible to give advice without considering equity release. It may not be the norm at the moment – partly because of the lack of suitable products – but also, as someone in the audience suggested, because it’s not always clear whether it’s the ‘best advice’.

Perhaps we’re yet to see some innovation in the space. And if a client’s home effectively becomes another tax wrapper to consider alongside other assets as part of holistic financial planning, then the tools and technology that support adviser propositions need to support this.

But there was broad consensus on one thing; financial planning (and the resulting advice) is shifting to focus less on just the individual client and more towards the whole family.  And with complex family situations as standard in many cases, a trusted adviser has a vital role to play in helping clients and their families tackle some of the big, emotional money issues head-on.

So, as we look forward to the next decade one thing is pretty certain. If facilitating family wealth transfer isn’t on our agenda – whether we’re an adviser, platform, product or service provider – we may not be around to see the next ten years.

Useful links

Royal London Policy Paper 12 – Will harassed ‘baby boomers’ rescue Generation Rent?