The nature of post-retirement advice continues to evolve following the shock of 2015’s pension freedoms. Systems can take a while to adjust to a new steady state after any big jolt – financial planning is no different.

The long-term trend in the advice market has been towards more robust planning processes, with advisers placing greater weight on assessing clients’ risk tolerance. The steady state prior to 2015 was building portfolios to asset allocation models that matched clients’ risk tolerance, which was just about defensible for accumulation and capital preservation, which were advisers’ main preoccupations.

Then pension freedoms threw a spanner in the works – advisers now have the additional burden of preserving capital while their clients are simultaneously trying to spend it!

Platforum was commissioned by Just to look at post-retirement financial advice and how income guarantees can be implemented in clients’ post-retirement portfolios. The resulting research paper is available here.

One of our findings is that the use of cashflow modelling is on the rise and is being increasingly used to help assess clients’ capacity for loss. The one-dimensional approach to risk-profiling – just assessing psychological risk tolerance – is now being balanced with the more objective measures of capacity for loss. Groups like EV are making this more robust, launching tools to forecast the chance of running out of capital and map that back to clients’ capacity for loss.

But other hazards remain. Advisers often underestimate clients’ potential longevity, and many still rely on deterministic rather than stochastic modelling, often leading them to underestimate the chances of running out of capital. Ultimately, the cost of providing income for life is significantly higher than many people assume.

We’re expecting a new steady state for post-retirement advice to emerge.

  • Cashflow modelling will carry more weight in client segmentation – identifying those clients who could be in danger of running out of capital.
  • Capacity for loss will trump risk tolerance for clients drawing down capital as well as income.
  • We’ll see greater layering of income and expenditure – securing the income needed to cover non-discretionary spending rather than relying wholly on multi-asset portfolios.
  • We expect income guarantees from such instruments as annuities to be used more widely in portfolio design. Their function will be to underpin core income in order to free up the remaining portfolio to generate income for more discretionary spending.

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” The sands have shifted in the six years since pension freedoms, but there’s still plenty more to come.

Read the full research paper: Retirement income provision in a post-pension freedoms world.