Retirement Income What You Need to Know

Retirement Income – what you need to know

Standard Life wants to help you to explain the benefits and challenges your clients may face when continuing to invest in retirement so we’ve provided some sample wording to help your discussions. We have simplified the messages and included a number of illustrations to draw attention to key points. You may choose to copy and paste this wording or use it to construct your own wording. Standard Life accepts no liability
for your use of this content; or for any reliance or advice arising from your use of
this content.

Helping you meet your investment goals in retirement

When you were saving into your pension, your goal was probably relatively simple – build up as big a pot as possible by the time you retire. In retirement, when it comes to spending your pension savings, things might not be so straight forward. Keeping your pension savings invested and managing the rate of spending brings new challenges and often greater complexity.

That’s where we can help. At <INSERT ADVISER FIRM>, we can put a plan in place to set you off on the right path to help you meet your investment goals in retirement. And, we’ll be with you along the way, continually reviewing and monitoring your journey. That means we can make any necessary adjustments to help keep you on track.

In retirement, you’ll probably have a number of different goals for your money. For some of those goals, such as meeting your everyday expenses, you won’t have definite timeframes so you’ll need to make sure that you don’t run out of money too soon. You’ll also have decisions to make on how to balance the retirement that you want with the retirement that you can afford.

As part of the investment plan we’ll put in place, we’ll assess your individual circumstances, taking into account:

· any future goals or specific needs you might have

· how your needs could change over time as the prices of everyday items rise

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· how long you might need to take an income for

· how much risk you’re willing to take with your investments; and therefore

· how much loss you’re able and prepared to accept

In this guide, we’ll look more closely at some of the main risks and challenges that can impact how long your money might last in retirement. By moderating these risks, we’ll aim to give you the retirement you’ve planned for.

As with any investment, please remember that the value of your savings can go up or down, and may be worth less than you paid in. Past performance is not a reliable guide to future performance.

Challenge 1: living longer means you need your money to last

Longer life expectancy means you could spend about a third of your life in retirement. So if you’re keeping your pension savings invested and using them to provide you with an income throughout retirement, you’ll want to make sure they last for as long as you need them to. The alternative is to buy an annuity, which provides a guaranteed income for life. However, there are pros and cons to this option too which you should consider carefully.

A balancing act

The problem is that there’s no way to accurately predict how long you’ll live for and therefore how long you’ll need your money to last. So whether you decide to buy an annuity or to keep your pension savings invested, it’s important that you maintain a balance between your life expectancy and how much money you think you’ll need in retirement.

Challenge 2: the cost of living can affect your income

The risk of your money not lasting as long as you need it to is amplified when you add inflation into the mix. Inflation is the rise in cost of everyday items. The higher inflation, the less you can buy with a fixed amount of money. This means that your money won’t go as far – your spending power is reduced.

In recent years, inflation has been low but it has been a lot higher in the past and it could change at any time so you need to be prepared.

As you can see from the chart below, an average rate of inflation of 3% over 20 years could halve your spending power. The effect is greater over longer time periods so it’s important to consider the implications of this in retirement, which could last for 30 years or more.

Source: Standard Life, effect of inflation

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Challenge 3: living longer (challenge 1) and inflation (challenge 2) mean you need growth

Many people are tempted to put their pension savings into less risky investments, or even a simple bank or building society account. However, research has shown that having investments which grow in value is a good thing in retirement. By giving your money the chance to grow over and above inflation, it has more chance of lasting as long as you need it to.

Take Mike as an example. He has pension savings of £100,000 and plans to take £4,000 a year from this as income.

If he invested all his money into a UK equity fund, it could last about 34 years when you look at the average outcome.

But if Mike puts all his money in a bank or building society account over the same time period, his money might only last around 23 years because it has far less potential to grow.

That’s a difference of 11 years, which could be critical if Mike has a long retirement.

Source: Standard Life. Based on expected returns in 1,000 economic scenarios provided by Moody’s Analytics. Assumes 4% annual withdrawal rate escalating with inflation, returns net of charges of 1.5% a year. Such forecasts are not a reliable indicator of future performance.

However, this simplified example doesn’t take into account several other important factors, one of which is the level of risk inherent in investing only in UK equities. Bringing us to Challenge 4.

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Challenge 4: market falls can reduce how long your pension savings will last

Investing in equities can bring great rewards when markets perform well and your pension savings grow as a result. But when they don’t, this can have a significant impact on how long your pension savings will last.

How your investments perform in the early years of retirement can also play a major role in how long your savings will last, especially if you are taking an income. This is because if the value of your investments drops due to falling markets, the amount you’re withdrawing becomes a larger proportion of your overall pot. If you are invested in higher risk investments, you could find that your pension savings run out faster because their value tends to go up and down more significantly.

Let’s consider Mike again. If he invested in a UK equity fund, his money might run out much more quickly if markets perform badly. In the worse cases (which are very rare) his money might only last 9 years – 25 years less than it could on average.

On the other hand, if he puts his money in a bank or building society account and markets perform badly his money could last him for 17 years, some 8 years longer. However, because of the lack of opportunity to grow, Mike may still find that he runs out of money before the end of his retirement.

Source: Standard Life. Based on expected returns in 1,000 economic scenarios provided by Moody’s Analytics.

Assumes 4% annual withdrawal rate escalating with inflation, returns net of charges of 1.5% a year. Such forecasts are not a reliable indicator of future performance. Please note you may get back less than paid in.

So putting all your money into growth investments could work against you if markets perform badly. But keeping all your money in cash may not be the best option either because you might not have sufficient growth. Remember, the possibility of living longer and the impact of inflation mean you need to grow your money too – which, in turn, means you may need to take some investment risk (challenge 3).

What all this means for you

You need to invest wisely to help protect your pension savings from the risks that can impact how long it might last and the amount of income you are able to take.

Making your pension savings last as the cost of living rises – the reality is that you could live longer than you expect, which means you’ll need your money to last longer too. When you add inflation into the mix, your spending power could be depleted and your pension savings completely eroded if you don’t take precautions to protect them.

Where you’re invested can have a large impact on how much you can take as income and how long this income might last – being too conservative with your investments could mean you miss out on vital growth benefits that come with perceived riskier investments. But, being too adventurous could put your pension money in situations that are too risky for you. So it’s important that your pension savings are in the right balance of investments to manage risk – to help protect the income you need in the short term but to take enough risk to help your pension savings last long enough.

Taking money in a falling market, especially in early retirement, could leave you with a smaller pot

– if you choose to take an income, any falls in the market could reduce how long your pension savings will last. The effect of market falls will be particularly magnified if they happen in the early years of your retirement. And because no-one can really anticipate when the next big market fall might happen, it’s important your pension savings are prepared for the unexpected, again by getting the investment balance right.

At {INSERT ADVISER FIRM NAME}, we’ll work with you to understand your personal retirement goals and then create an investment plan that takes all of these things into consideration. As part of our service to you, we’ll also actively monitor and manage your investments within parameters we’ll agree with you.

Call us on {insert telephone number}. We’ll book an appointment and chat through your options.

Standard Life Assurance Limited is registered in Scotland (SC286833) at Standard Life House, 30 Lothian Road, Edinburgh EH12DH.Standard Life Assurance Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

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