The budget has just proven to be a retail savings game changer. I had rather become used to budgets which just squeezed people, with very few real incentives for the hard working, committed investor.
Those who had committed to long term savings, particularly through their pensions, to build a pot large enough to retire on kept finding the sands shifting beneath their feet. Those who had followed the rules, forgone consumption today for a better later life appeared to be particularly under threat. Reducing lifetime allowances and annual allowances, higher tax rates and the nonsense that annuities had become all added up to a real dissatisfaction with the pension as a savings vehicle.
The Chancellor has now broken the ‘pensions are for life’ consensus that has prevailed for decades and left annuity providers reeling and those approaching retirement cheering. From 2015, no longer will retirees be herded towards annuities, usually with only passing reference to the Open Market Option, and the shocking value they have come to provide. Yes, I appreciate there were other ways to do things but many just didn’t go those routes; either through a lack of knowledge or confidence. So we are now in a situation where retirees can make adult, responsible choices with their hard saved pension funds. They can take the levels of income they might actually need, take their pension in its entirety subject to their non tax-free element only being taxed at their marginal rate and not at a punitive rate.
As a side note, I don’t for one moment think that the majority of these prudent savers will just rush out and blow their pension funds on supercars or the like. They have already proven they can forgo consumption for security. I have listed to the dire warnings from the usual quarters but surely we should allow personal responsibility to come to the fore here.
This access to pension funds will mean a huge amount of new work for advisers and asset managers.
As many clients will remain invested and seek advice we will see;
• An increase in accessible wealth with an increase in the numbers of clients with investable assets justifying financial planning advice
• There will be an increase in demand for tax planning and mitigation including a focus on estate planning and inter-generational transfers.
• It is likely that income in retirement planning will become quite specialised as it has become in the US.
• The incentive to save in pensions and the attractiveness of the vehicle as a tax efficient means to invest is greatly increased with perceived barriers to saving being removed.
• Asset managers will see funds remain invested for longer and pass through the generations as opposed to losing them to annuities.
Returning to the investor, they now have a longer savings horizon and therefore an increased set of responsibilities. They need to actually save enough for retirement, maintain and manage their portfolio to produce enough income by investing appropriately. This is likely to mean not just through cash and fixed income but via the equity markets for longer. Increasing longevity will mean that stewardship of the pension funds will become ever more difficult.
But I would argue here that the real responsibilities will fall on the financial services sector.
Information and confidence in savings and investment is asymmetric. We should know more than our clients and unit-holders and we should use this knowledge for the good of the investor.
Therefore it is up to us to behave in a completely responsible way and ensure that we give those who entrust us with their financial well-being the optimum chance of success.
This means technically correct, appropriate advice around all of the areas I have outlined. Product design must be much better and more consistent.
Our record here is not great. I was just coming into financial services when the great move to personal pensions was happening. Thatcherite policy based around individual responsibility was in full swing and instead of getting it right the industry offered shocking advice, poor product design and terrible value. We are all to blame for this period but I do believe however that things have got much, much better. A combination of regulation, education and a genuine desire to connect and
assist clients and investors is leading to better results for most investors.
However, my fear here is that we may see something akin to ‘gold fever’ with these new opportunities we are being presented with in this budget seeing the industry move in to stake their claim on this capital to the potential detriment of the retiree.
I have seen shocking advice over the years as investors arrive with poor products, poor advice and carrying real resentment at how they have been treated after trusting their advisers and providers.
Whilst we are sometimes able to sort this out and get clients back on track it is not always possible and this is appalling.
‘Inflation proofed’ funds which shut at the first sign of inflation, structured products linked to esoteric benchmarks marketed as safe, the ridiculous ‘guaranteed funds’ with a lower case ‘g’, clients moved from version 2 to version 3 to version 4 of life company pension products benefiting the broker consultant at the insurance company and the adviser but rarely, if ever, the investor. I could go on but I am sure you get my point.
What we actually need now is a commitment to ensure we assist our clients benefit from this new found financial freedom. Great advice, great product design, proper discussions around risk and capacity for loss. Income in retirement products which offer stable and predictable returns to assist with planning and which are not unfairly costed but are transparent in design and contract terms should be the norm. No more 5% to get in and 5% to get out, no more hidden terms, no more launching rubbish funds, just imagine. No herding towards equity portfolios if an annuity is actually right for the retiree.
If we get this right we may just all benefit from our increased responsibilities and this can only be good for the long term financial well-being of the population.