Andy Leggett, Head of Business Development at Barnett Waddingham, writes for Investment Sense:
When you first start planning for retirement, ideally at the very first opportunity in your working life, it can seem a daunting task and the target can seem so far away that it’s difficult to visualise ever getting there. Bad golfers everywhere will know the feeling: it’s the same one you get standing on the tee of a particularly long and tricky par 5.
It’s not an exact parallel. For instance, in golf you know how far away the pin is and you can see the obstacles in your way (even if you can’t avoid them). Perhaps it’s more like playing that par 5 for the first time, in the dark. The hole represents the point at which you have sufficient funds accumulated to retire. Or perhaps I should say you think you have sufficient – you won’t know what lies ahead of you from that point either. Anyway, I think you get the picture: the analogy is clear but the path in front is fuzzy.
Technology is everywhere these days – and that includes the golf course. Technology eats data for breakfast. It isn’t daunted by calculations or decimal places: it crunches numbers to the nth degree of precision. No more analogue fuzziness, technology now brings us ultra-high-definition. Now, as you stand on the tee, wondering which club to use, how far you can hit the ball, whether to try to go round the obstacles or over them, there is technology to produce the answer. Apps, course guides and all sorts will show you which club, which direction, what distance; they’ll map the precise trajectory of your ball and exactly where it should land. I say “should”. The algorithms don’t yet seem to know when you’ll top the ball or when your persistent slice will unexpectedly become a hook. They simply don’t try to answer questions like “Which part of my game stinks the least today?”
Technology of a sort is going to invade a bit more of pensions soon, from April next year to be precise. That’s when SIPP providers will have to start producing illustrations for all potential new business. These illustrations are not completely new; you may have seen them before. Insurance companies already produce them for their Personal Pensions and some SIPP providers do too. If you have had a SIPP for more than a year, you should have received an illustration at the anniversary (a type called a statutory money purchase illustration, SMPI) and if you’re in Income Drawdown, you too will have received a variant.
It’s well-worth a small amount of your time to understand a bit about what these illustrations do – and don’t – show you. They are not dissimilar to the golf apps that show you the perfect shot in exquisite detail. They don’t show you what will happen to your SIPP fund; they are intended to show you what might happen. No one can tell you what will happen. They make various assumptions and perform a series of elaborate calculations. From this, they project the result. That result is not your inevitable destiny, just as the shot on the golf app isn’t.
So, here are some things to bear in mind when you next find yourself looking at an illustration. No mathematical genius or pension nerdiness is required.
1. Unless you are very close to retirement, you don’t know when you are going to retire. You know when you would like to but that’s not the same thing. If things are going better or worse than expected, you may be wise to alter your game plan. Altering your retirement date is one of your options.
2. You don’t know what income you need to retire on. You know how much you would like in today’s terms to fit your current circumstances but that’s not the same thing. As you get closer to retirement, the level of uncertainty will reduce but so too will the time available to make adjustments. You may find you need to change the level of your contributions and/or your retirement date.
3. The value of your fund will not grow with monotonous regularity. Illustrations assume the same growth rates every year, they have to assume something, but that will not happen in practice. Many investments will fall in value at times and grow faster than expected at others. You must try not to let the ups and downs of investments make you complacent or despondent.
There’s one final area of fuzziness I’d like to draw to your attention. Illustrations do not just show your fund growing at one rate. There is also an upper and a lower rate. These are not best and worst case scenarios. Even bad golfers have days when everything comes good all at the same time; there are also days when everything conspires against you and you can do no right. Illustrations make no attempt to allow for dizzy coincidences of luck or for disaster upon calamity. The timing of these events can have a devastating impact, as those who have experienced simultaneously falling investment values, falling interest rates and falling annuity rates can attest. So one final point is:
4. Do not place faith in the upper and lower growth rates; they are not limits.
It’s as well to understand that the path ahead is fuzzier than the high-definition picture conveys but that doesn’t mean you should lose heart. Like a golfer, you can make continual adjustments after your shots and the target will get closer, albeit erratically. And if you are struggling, you can always take a leaf out of the golfer’s book: just as they go to the professional for lessons, so you can go to an Independent Financial Adviser (IFA) for help.