The coming pension changes will cause a seismic shift in UK retirement planning. The protracted way the proposed new rules have been drip fed by George Osborne has ensured the debate around them has continued to dominate the headlines ever since the initial announcement in last year’s Budget. With just weeks to go, several details remain to be ironed out.
The views of providers, pundits and politicians have been well documented, but what about advisers? How do those at the forefront of actually delivering retirement planning think the new landscape will look? We used our latest Intelligence survey to gather your views on how you think the new freedoms will impact on your clients.
Now and then
Our first question set out to establish how the retirement planning landscape looks now, before the new regulations arrive. We asked advisers to select all vehicles they used in funding their clients’ retirement now. Predictably annuities and drawdown were the most popular, although open-ended investments also emerged as being widely used.
On top of the options available, 24 per cent also chose ‘Other’; a third of these said investment bonds and just under a fifth said Isas. VCTs and EISs also got a mention. Results can be viewed here.
These results become more interesting in the context provided by the next question – what vehicles advisers expect to use after the regime begins.
For the most part, the two sets of results are notable for being more similar than expected. The number expecting to use annuities drops slightly compared with those currently using them, but only marginally from 89 to 83 per cent. This fall is mild when set against dramatic headlines pronouncing annuities’ demise, although the questions did not ask about expected volumes of annuity business.
Similarly drawdown saw a small increase, up two percentage points to 96 per cent. The biggest shifts were in equity release, which went from 30 to 37 per cent; and investment trusts, which 41 per cent of advisers anticipate using, compared with the 32 per cent that do currently. This latter figure compares with a small expected drop in investment trusts’ open-ended counterparts, from 80 to 77 per cent. Results can be viewed here.
We then asked to what extent respondents agreed with various statements that have been widely espoused since the new rules were announced. The view – rapidly gaining traction as received wisdom – that annuities will die out is not supported by the results. More agreed than disagreed with the statement that, “Many retirees will continue to seek the security of annuities” although those that disagreed were much more likely to do so ‘strongly’. Results can be viewed here.
Lamborghini salesmen should also not get too excited, as 63 per cent of respondents disagreed that most retirees would take their entire pot as cash, 23 per cent strongly disagreeing.
When asked what proportion of individuals advisers expected to outlive their pension pots, just over half said a ‘significant minority’ would see their money run out. And, strikingly, a significant minority of our respondents – about a quarter – said either ‘half’ or ‘most’. Results can be viewed here.
There was more optimism when it came to the opportunities that the new landscape could present for advisers. An overwhelming 76 per cent saw the changes as a great opportunity while only 10 per cent expect individuals to satisfy themselves with face-to-face guidance. Results can be viewed here.
Of those who chose to add comments, there were a variety of cautionary notes to temper this positivity. Having identified the new rules as presenting an opportunity, commonly raised caveats included warnings that people would expect free advice, and that, rather than providing a panacea to fix retirement funding for the masses, the new rules will only really present an opportunity for those clients with significant funds.
Attitude
Next we looked at generic attitudes, asking respondents to list what was most important to them when arranging retirement funding. Of the six options we provided, 44 per cent said that consistent inflation-beating income was the priority, although 8 per cent placed it as the least important requirement. Results can be viewed here.
A guaranteed income for life was the key concern for 23 per cent. A further 16 per cent said it was the second most important requirement, again suggesting the kneejerk pronouncements of annuities’ demise in the immediate aftermath of the new regime’s announcement may have been exaggerated.
The potential to grow an underlying investment was cited by 17 per cent as the most vital need with the ability to make ad hoc withdrawals and the ability to continue to actively invest the priority for 8 and 7 per cent respectively.
The ability to pass on a pension pot as inheritance was least likely to be the priority with just 2 per cent placing it first. This much-trumpeted change to the way pension pots are treated, despite being broadly welcomed, seems to be seen as nice to have rather than essential.
Our final question asked about the shift to using income-providing investments as a source of retirement income. Most expected those at retirement to begin to embrace these vehicles, with just over half expecting this to be prompted by the guidance offered at that point. Perhaps surprisingly, 8 per cent do not anticipate that retirees will embrace income investments at all.
The most striking outcome from the survey as a whole is that there is no real consensus. Some questions produced a majority view, but it was rarely conclusive. Results can be viewed here.
There is clearly much uncertainty about the new landscape. The nearest we came to unanimity was when a huge majority declared that they saw the new regime as presenting an opportunity for advisers. This positive outlook is despite well publicised doubts – covered elsewhere in the survey – about the guidance guarantee, the likelihood of funds running out and the lack of time the industry has been given to prepare.
There is much still to be decided, and nobody really knows yet how the new landscape will play out, but we might be able to allow ourselves to hope that advisers remain as positive in a year’s time, when the new regime has had a chance to bed in.
Thank you to all who took the time to complete the survey.
Intelligence: the AIC response
Income-producing funds are likely to become more prominent in retirement planning. Annabel Brodie-Smith makes the case for investment trusts
We strongly support the changes allowing pension savers freedom over how they take an income in retirement. We’ve even launched a ‘Freedom in pensions’ series looking at how investment companies can be used. Advisers think these reforms will present a great opportunity for them to provide ongoing advice.
Pensions, of course, are about the long-term, which is where investment companies are strong. But April’s changes have focused on income. Investment companies have unique advantages in delivering a higher or growing income as part of a well-balanced portfolio, and it’s encouraging that those surveyed are recognising this. But there’s more to be done.
Interestingly, 41 per cent of advisers anticipate using investment companies post-April to generate income in retirement in comparison to the 32 per cent who currently use them. However, 80 per cent currently use income producing unit trusts, and 77 per cent anticipate doing so post-April. So the survey indicates more will be considering investment companies but there are still a lot who say they will not be using them for their clients in the new pension regime.
So why would you consider investment companies for your clients’ pension pots? Investment companies have a strong performance record when it comes to long-term investment. Recent research of comparable closed-ended and open-ended sectors by the analysts, Canaccord Genuity, confirms this, with investment companies outperforming open-ended funds in 12 out of 15 sectors over 10 years. The closed-ended structure of investment companies allows managers to take a long-term view, unlike open-ended funds, where managers control inflows and outflows. Some of this outperformance is also due to investment companies’ freedom to gear to enhance returns. Gearing magnifies performance in strong markets, although it can be a drag in poor markets. The reality is that most investment companies are moderately geared, with the average level just 7 per cent.
When it comes to arranging an income for retirement, consistently beating inflation was most important, while the potential for growth of underlying assets featured prominently and the ability to pass on the pension pot as inheritance was a consideration. Investment companies have an enviable track record of paying consistently increasing dividends each year, with the City of London investment trust having an impressive 48-year record of increasing dividends. This is due to investment companies’ ability to hold back some income in good years to pay it out in leaner ones. So how could this work in practice to generate an income?
We looked at an investment of £100,000 in the average UK Equity Income investment company over 20 years from 1 September 1994. This generated an initial annual income of £3,265 by 31 August 1995. By 31 August 2014, annual income would have grown to £8,139. The income grew by an average of 5 per cent per year over 20 years, more than 2 percentage points above inflation (RPI). In addition, the capital value of the investment more than doubled to £222,315 – a 122 per cent increase, again well ahead of inflation.
Of course this isn’t for everyone; there are risks to capital and income. But for clients who are happy to accept these risks and see the ability to hand on assets after death as a priority, it’s something to be considered.
Investment companies can also invest in a wider range and are suited to less liquid assets. These assets can offer a higher level of income and are better suited to being held in a closed-ended structure. Investment companies, unlike many open-ended funds, also don’t have to pay dividends just out of the income they receive from investments. They can also use profits they make when buying and selling investments. This will reduce capital profits, but is a useful tool to maintain dividends in difficult times.
Further details on freedom in pensions can be found in a dedicated section of the website www.theaic.co.uk. The AIC also runs online training and seminars around the country; visit www.theaic.co.uk/financial-advisers for details.
