Only by using the risk-profiling questionnaire as a stimulus for discussion, both initially and in the future, can we hope to understand how our clients feel about their money and advise them accordingly.
The types of risks that advisers, clients and a retirement planning strategy will need to consider are:
• Market risk – the risk of poor market return in relation to any assumed returns.
• Asset allocation risk –the risk that investments are in the wrong assets at the time of encashment.
• Interest rate risk –the risk that interest rates move in the opposite direction to what was assumed.
• Political risk – the unintended (and perhaps unforeseeable) consequences of decisions made for political or macro-economic reasons, for example quantitative easing and falling gilt yields causing a squeeze on annuity rates and GAD rates for income drawdown.
• Employment risk – the risk that employment income does not reach expected levels and contributions cannot be made or that employment ends early due to redundancy.
• Inflation risk – the risk that inflation leads to an erosion of the real purchasing power of retirement income.
• Health/liquidity risk – the risk that poor health brings about a need to liquidate financial assets earlier than anticipated .
• Mortality risk – the risk of dying too early post-annuitisation, or the loss of any material human capital needed to supplement retirement incomes.
• Longevity risk – the risk that an individual lives longer than anticipated meaning that the period in retirement is increased.
• Behavioural risk – the risk of behavioural biases leading to inappropriate retirement planning decisions, including saving too little.
• Counterparty risk – the risk that a financial institution providing guaranteed benefits fails.
• Legislative risk – the risk of a change in legislation that reduces future income. This could be as simple as a reduction in GAD rates or as complex as the effect of Solvency II on annuity rates.
Andy Zanelli is head of retirement planning of Axa Wealth
