Given the well-documented increases in the cost of living, some clients may be looking to withdraw money from their pensions to top up their existing income.
This could be a reasonable, or indeed the only, option for some but advisers should be asking some hard questions before they recommend this course of action.
Do they really need to spend more?
Most people hate to accept a downturn in their lifestyle and will often strenuously oppose the idea that they could do without some of the things that support it.
It is true that some items mean more to some people than others; a holiday may simply be a chance to have fun for some, while for someone spending their last days with a terminally ill spouse it could mean everything.
Clients will always have a reason they believe they cannot spend less, but in order to do their job advisers must at the very least question if their current expenditure is really necessary.
The inescapable fact is that spending more now almost certainly means spending less later.
Is the situation likely to get better soon enough to make up for the additional spending?
Many clients have received very strong investment returns in recent years and it may be tempting for them to assume that future returns will restore their fund values even after more money has been withdrawn.
This is a plausible argument. However, even if these returns are maintained, increased spending will result in greater depletion and sadly most commentators do not believe that returns will continue as before.
We also do not know how long inflated prices will continue to apply and when, or if, clients’ spending will return to previous levels.
In addition, advisers must consider the impact of sequencing risk, so-called ‘pound cost ravaging’.
A fund value that is reduced in value now will have to work much harder in future. Even if returns improve the return will be made on a smaller fund and it may never catch up with the overall growth it might have achieved.
Clients who have already survived a few years of income drawdown will have built up larger funds, but may still need to be persuaded to give up unnecessary expenditure to ensure they can maintain their lifestyle in the long term.
Advisers who use cash flow modelling should show the client the impact of increased spending and ask them to look at an alternative ‘what if I spend less’ scenario, with specific focus on longevity and income sustainability.
Offsetting increased energy bills by reducing other expenditure, if possible, will almost certainly deliver a better result.
What other options do they have?
It is not uncommon for clients who have reached pension age to look at their pension first when in need of more income.
