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Advising your clients by need, not wealth

When the regulator launched the Product Intervention and Product Governance Sourcebook (PROD) over two years ago, their aim was to ensure client need and suitability remains at the centre of all product recommendations. Andrew Tully, Technical Director at Canada Life, discusses what this means for retirement planning, the array of client needs you need to consider, and how you can incorporate this efficiently into your advice process.

When clients move from accumulating wealth to drawing down that wealth, there are several individual factors to consider, making it more complex than the accumulation phase. This might include – among other things – which wrappers the client holds money within, what their tax position is, what their aspirations for retirement are, their attitude to risk, and how much money they plan to pass down through the generations. Indeed, the amount of money they have is only one part of the decision-making process.

Adhering to the PROD guidelines means demonstrating you have fully understood your clients’ needs, recommending solutions that meet those needs, and ensuring those solutions remain fit for purpose as personal circumstances change over time. But what does that mean in practise? Here are some of the key considerations:

1. Retirement life stage
Age is important, but it can also be misleading. You can have a 65-year old in ill health, living a sedentary lifestyle. Or an 80-year old in good health, spending their days travelling the world. What is more important is to understand your client’s individual needs, whether your client is seeking an active or passive retirement, or are they approaching a later life-stage and possibly entering long-term care.

2. Wealth distribution
Your recommendations might differ according to how your clients’ accumulated wealth is distributed. For example, a client with a large amount of money tied up in property might be better advised to use equity release to partially fund their retirement, alongside their pension. Why? Because funds from equity release are free of income tax and, since property remains within their estate for IHT purposes but pension savings don’t, it might also minimise their IHT liability. Equally, a client with a large amount of pension savings, but little in the way of other assets, will need to carefully invest and protect those savings for the longer-term if they have nothing else to fall back on.

3. Existing pension schemes and what they offer
Consolidating pension schemes into one place can make a lot of sense as clients approach retirement. But this needs to be fully justified. Transferring clients away from final salary schemes, guaranteed annuity rates or workplace pensions will be closely scrutinised by the FCA. Before moving clients away from existing arrangements, you must show you have considered the impact this will have from a cost, investment risk, level of income flexibility, and estate planning perspective.

4. Lifestyle aspirations for retirement
Wealth isn’t always an indicator of how much a person will want to spend in retirement. You will need to get under the skin of your clients’ likely expenses, such as club memberships, holidays, home renovations, not to mention basic living costs. It’s important to work with them to match withdrawals to income needs, especially in the early years as drawing too much too early may adversely affect the value of their funds in the future and may result in them paying more income tax than they need to. Equally, you will need to address affordability issues if reality is not going to meet expectation. Recommending a flexible income solution is a good way of addressing the likelihood of changing income requirements. Legislation, such as the Money Purchase Annual Allowance, will also play a part in deciding how and when to access income.

5. Attitude to investment risk and capacity for loss
It is important a client understands the difference between the amount of risk they want to take, versus the amount of risk they need to take. This works both ways. They may be happy to take more risk, but don’t need to. Or they may be highly risk averse, which could result in them running out of money should they live for a long time. Once you have a good idea of their income requirements, and income capability, then you can discuss how much risk they need to take to comfortably achieve that. Understanding your clients’ capacity for loss is critical in this process.

6. Desire to leave money to family
Not everyone will strive to leave a lasting financial legacy for their family, yet for others it will be a key requirement. And the amount of their overall wealth can have little bearing on this. Quite often it’s the less wealthy clients who place considerable importance on leaving an inheritance. Understanding your clients’ feelings about this is vital as it may affect how you structure their income. For example, it might make sense to leave their pension savings untouched for as long as possible since these savings sit outside of their estate for IHT purposes.

7. Need for flexibility
It’s not always easy to predict how a client’s circumstances, and therefore income requirements, might change. If they are younger and still intending to work in some capacity, they will need less income to start with, ramping it up once they decide to fully retire. Equally, if they are in ill health, they may want to maximise their income now, while they can still enjoy it. And the State Pension is likely to change a client’s financial position when it comes into payment, potentially reducing the need for income from other sources.

8. Health
Asking your client for their medical background can be awkward, but it’s very important to know their medical and lifestyle circumstances before making any recommendations. Not only could ill health mean they qualify for better rates on certain products, it can also help you understand what their short and longer-term retirement needs will be. And this is a process which needs to be completed at each review.

Building a Centralised Retirement Proposition
It’s clear that understanding and evidencing your clients’ retirement needs before making recommendations is not for the faint hearted. We continue to have regular conversations with advisers to help them embed a Centralised Retirement Proposition (CRP) into their process. While many advisers have a Centralised Investment Proposition (CIP), a robust CRP is harder to come by. Yet, having a framework that helps you segment your clients according to their needs, and navigate the various interrelated risks of giving retirement advice, could prove invaluable to your advice process. Not only would it help you meet the guidelines set out by the FCA, it could also help make your retirement advice process more efficient.

Contact us
If you would like to talk to us in more detail about how to set up a CRP, you can email us, call us on 0800 912 9945 or contact your local Canada Life Account Manager.

Andrew Tully
Technical Director
Canada Life


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