InvestmentsSep 8 2014

Pension changes have broad impact

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Pensions have undergone many changes in recent years – from the complete overhaul of ‘A’-Day on April 6 2006 to the latest developments announced in the Budget – but these actions also have an impact on the wider investment environment.

Jasper Berens, head of UK funds at JPMorgan Asset Management, says: “UK advisers are going to have to step up to much more comprehensively advise clients on how they take their capital and income from maturing pension pots and, furthermore, how this works in the context of using their other accrued savings pots or their property to support their changing lifestyles… during retirement.

“The announced retirement freedoms may create as much as a £9bn market flow in 2015, equivalent to an approximately 40 per cent increase in UK open-ended net flows. That scale of change is going to have an enormous impact on how advisers conduct business. Given that more than 91 per cent of current drawdown assets are currently adviser intermediated, IFAs are right at the heart of this. Early consumer surveys suggest that roughly 32 per cent of defined-contribution assets will be ‘money in motion’, either entering drawdown wrappers or ISAs, which are not overseen by the pension scheme or trustees.”

One of the interesting aspects of the pension changes will be its effect on platform business, and whether this will be the new conduit for pension investors of the future.

Bill Vasilieff, chief executive of Novia, notes the changes seem to have sparked a lot of pricing changes on platforms but says the real question is what impact it will have on the end customers.

“There are different groups of customers where different patterns seem to be emerging. First, the very wealthy where customers’ pension pots are already at the maximum permitted and the investor is not dependent on their pension for a large part of their income in retirement. A lot of these seem to be saying they have had enough of political interference and will take the opportunity from the reduction in tax rates to get out and cash in their pension investing. They will, of course, be interested in Isas, EISs (enterprise investment schemes) and others,” he explains.

“For the less wealthy, they still need the security that annuities bring and it is likely they will still invest at least a proportion of their money in an annuity to provide a guaranteed underpin. For those in between it is already the case that these people are looking at other ways of investing for their retirement while at the same time investing in their pension plans. That would include ISAs – now up to £30,000 per annum per couple – and property, including, of course, potentially downsizing.”

Meanwhile, Steve Trott, proposition director at Parmenion, notes that the “wall of pension money” that traditionally would have gone into annuities will now sit with consumers armed with increased knowledge from the government’s regulated guidance initiative.

He says: “This will lead to a number of small pots being taken as cash and needing a home. For pensioners with funds who avoid the natural human urge to consume, Isas will be the home of choice in the first instance.

“Smart advisory firms will augment their business models to include simplified advice services to widen their appeal to this wider more informed demographic. These services will be technology-based and created by platforms. If advisers do not evolve their services, this part of the market will be captured by the new breed of D2C [direct-to-consumer] execution-only platforms that are soon to hit the market.”

Mr Trott points out that larger pension pots will most likely find a natural home within low-cost platform-based Sipps, which could lead to increased price pressure and at the same time result in increased demand for more user-friendly technology.

“Taking new money to one side, the pension drawdown market has traditionally been dominated by life offices. With the advent of the new rules and pricing pressure, many advisers will review their existing clients to consider the potentially better outcomes available through new technology. With the right positioning, platforms stand to benefit massively from this transfer opportunity.

“Platforms and pension income are all about investment. There are enormous opportunities for discretionary fund managers to innovate in the way they generate income for clients and build simple, transparent investment solutions that manage the risks associated with generating an income.”

Nyree Stewart is features editor at Investment Adviser

Platforms and pensions: key figures

3/5 – Proportion of advisers who think only half or fewer of their clients will be able to fully take advantage of the new Isa allowance of £15,000

49% – Percentage of advisers that expect Sipp pricing structures on platforms to reduce

67% – Percentage of unwrapped assets sold through platforms

98% – Percentage of new stocks and shares Isa business written on platforms

Source: Platforum

Expert view – pensions and investments

What do the pension changes mean for the investment world, advisers and platforms?

Jasper Berens, head of UK funds, JPMorgan Asset Management:

“Advisers will have to raise their expertise to meet a newly opened market, requiring them to gather significant context across capital markets, investment strategies, and financial planning, not to mention no single client will have the same set of circumstances. To be equipped, financial advisers have to think about client needs at all stages of the retirement journey.”

Ben Willis, investment manager and head of research, Whitechurch Securities:

“[Pension changes] will have a big impact, positively for the platforms. Retirees have greater control of their pension investments – whether this entails taking the whole pot, phased withdrawals or moving into income drawdown. The flexibility means that monies will have to be managed and the simplest way for advisers to do this is by putting clients’ monies onto platforms. Discretionary fund managers may also benefit as they will be able to manage monies on their clients’ behalf, thus removing this burden from advisers.”

Bill Vasilieff, chief executive, Novia:

“With state and employer guarantees disappearing fast and the need to potentially work beyond retirement age – either in full-time work or potentially into part-time work – the real need is for flexibility and not to be restricted by pension rules, and to take into account all of a client’s assets when retirement planning.”