PensionsMay 22 2015

Panel debate: How retirement advice will change

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Panel debate: How retirement advice will change

Emma Ann Hughes: Do you think more advisers should be considering state pension deferral?

Robin Ellison: That’s a good question. I think most advisers will take it into account when giving a holistic piece of advice to the client. The advantages of deferring are not so good as they used to be because the government’s about to reduce the benefit you get from getting deferral.

Second, the tax rates are bound to go up over the next few years so you might as well take the money now.

And third, no one knows what’s going to happen if you do defer on the chance of politicians changing the rules of the game in a year or two. It’s not a black and white question for advisers. If they don’t take it into account they’re going to get criticised, and if they do they’ll get criticised anyway. It’s very important for advisers to keep a clean file, but the benefit of deferring is not quite as strong as it used to be.

EH: A question has come in from Mark Chipperfield. He wants to know whether the public’s fetish for lump sums will override all sensible considerations?

Billy Burrows: I think it depends who they speak to. If they speak to their friend in the pub they’d probably take the cash. If they speak to an adviser or even go to Pension Wise then hopefully they’ll understand the issues. My words of wisdom are that freedom isn’t a licence. Just because people have got freedom, it isn’t a licence to spend their money unwisely.

EH: And another question, this time from Shelley McCarthy. Why do you think the insurance companies are making life difficult for those looking to withdraw?

BB: I don’t think they are making it difficult, I think you have to have a bit of sympathy for them. They’ve been overwhelmed and clearly they’ve staffed up but they probably haven’t put enough resources into it. And, as Robin said earlier, there are a lot of compliance issues behind the scenes.

EH: Robin, what is the extent of the compliance issues?

RE: There are lots, it’s really hard. If insurance companies are going to sign the cheques without having done all the paperwork they’re going to get into a lot of trouble with the regulators. So it’s hard to criticise the insurance companies. I don’t think there’s a plot to stop people from getting their money. What is a problem is that people are being led to expect they can have their money before age 55, which they’re not entitled to. I think there are some false expectations out there.

EH: Maria, what would you say are the challenges for people who are trying to rely on a regular income from annuities or other investment products in the current environment?

Maria Municchi: We need to consider that the investment environment where we find ourselves today is quite different from the past. Interest rates have been coming down, the yields available on many of the asset classes within fixed income are very low compared to the historical level. The risk is that achieving a certain level of income will be more and more difficult for people looking to plan for their retirement. This is where these new freedoms are interesting because they give the opportunity to look at different options. But with new freedoms comes more difficulty as well as responsibility. As a product provider, we think the role of advisers is becoming more and more important in the industry.

EH: Talking about difficulties, Rory Blacker of Life Planning Solutions asked what lessons should be learned, given the experience in Australia where they’re moving back into defaulting into an annuity? Billy, should annuities return to being the default?

BB: I don’t think it’s so much the default, for most people they need some certainty and flexibility and increasingly we’re seeing a trend of people combining annuities and drawdown. So I think the lesson from Australia and even from America is that systematic withdrawals don’t necessarily give you the right outcome all the time.

EH: Clearly there’s cause for concern regarding what to do with insistent clients. Billy, what should an adviser do if a client listens to their advice but does not want to take it?

BB: Well, the first thing is that an adviser must clearly document it. I think advisers are on strong ground if they refuse to do the transaction but there’s little that can be done if an adviser tells a client not to do something and then the client goes and does it with another adviser or even by themselves. But advisers have to be very careful over this.

EH: Robin, what’s the regulatory view?

RE: It’s a real tricky thing for advisers. They’re damned if they do and damned if they don’t. And often if they don’t do it, the client can complain that they were given instructions to do something and they didn’t do it, and if they do it then they’re damned again, so it’s a real dilemma. I’ll go to Billy’s point, which is put it on paper, document it, and make sure your insurance policies are paid up to date.

EH: Are there any past cases?

RE: There was a dreadful one called Berkeley Burke, which is not simple because there are arguments both sides. But the non-adviser said they were not going to take [a request] on, “it’s very high risk, please sign this document that it is very high risk, and it’s your fault if it goes wrong”.

Of course it did go wrong, and the ombudsman made them pay the full whack, which is quite a lot of money. So it’s a really tough call for the advisers and it’s one of the days where I’m glad I’m a solicitor and not an adviser. It’s not easy being an IFA.

EH: Maria, can providers help advisers with these sorts of clients?

MM: For us it’s crucial there is a good relationship between adviser and client because this means that eventually the client will end with the right product. From our perspective it’s very important to talk to the adviser and make sure he’s well documented and knows what the products are about and that we have a very clear and transparent communication with them.

EH: A question has come in from Nigel Nicholls. He wants to know your views on DB transfers to DC for death benefit enhancement?

RE: It’s kind of a no-brainer, really. If you think it’s a good thing to do, why wouldn’t you. As Billy mentioned earlier, it might be a good idea if you want to pass it down the generations, so that’s the good news. The bad news is you might only get 80p on the pound because most DB schemes are in deficit, so you may not get the full whack, and you won’t get the life cover you would have had in the DB scheme.

There’s another little added consequence that if you hate your spouse, there’ll probably already be an automatic spouse benefit in the DB scheme, and there won’t in the DC scheme so you can use the money for your own benefit. It’s a complicated matrix, and again documenting it is critical. But the opportunities are pretty good. And it gives IFAs the opportunity to manage money, which is very attractive.

EH: Maria, when considering any type of decision on this, how should inflation trends and investment risks be assessed?

MM: It’s certainly key to look at those two risks when thinking about how to plan for retirement. It’s true that inflation is trending lower in the last few months and years but that doesn’t mean that in the long term we shouldn’t think about the impact it has in planning for retirement. Again we’re making sure that we’re making the right provisions.

Investment risk is key as well and I think this is one of the reasons why we’ve seen more interest in multi-asset funds from advisers in recent times. It has been linked to the ability to delegate the asset allocation call to fund managers and target what is more the right type of product for clients.

EH: Billy, do you think advisers think enough about inflation when considering at-retirement income options?

BB: Inflation is like sin. Every government denounces it but they all practise it. I had a client say the other day, “are we in for a Japanese-type experience?” The difficulty with inflation is that people are living so much longer so they do have to have an eye about sustainable income. I think that’s probably one of the things advisers are going to be talking to clients about now more – how do you get a sustainable income in real terms?

EH: Maria, have you seen or do you anticipate pension cash being moved into multi-asset?

MM: There is certainly the potential for that. Of course multi-asset is an add-on to what we can invest in for our retirement planning. But certainly the asset management industry has been preparing for it and we have seen quite a lot of new multi-asset income funds launched in the last 18 months.

Our M&G Episode Income Fund is now close to reaching its five-year track record and our view on what we are trying to achieve with this product was very much linked to a demographic shift and increased longevity and the need for people to achieve sustainable income over a longer period.

EH: Billy, what do you think of some of these multi-asset funds and how they’re changing for this new world?

BB: I’m very interested in the multi-asset funds that are looking to be more tailored towards drawdown. And if you ask most people what they want, they’ll say we don’t want to shoot the lights out, we want good returns, but we want to be protected from the downside. I think there’s a lot of potential for multi-assets to fit hand in glove with some drawdown strategies.

EH: Obviously there’s been a lot of talk about money going into buy-to-let. Robin, can you see a lot of pension cash going into property?

RE: I think there’s a lot of talk about it. It’s much harder to do in reality than people anticipate and I think not quite as much is going to go in as the market expects. I’m not too bothered. It’s hard to manage, there are expenses in doing it, and people on tight incomes, if they have a couple of months empty, are going to struggle. There is money around to do it, but I have a feeling it’s not going to be quite as big a thing as people think.

EH: Billy, what are your expectations on buy-to-let?

BB: I think the grass looks greener, but it rarely is. You’ve got to have quite a lot of money before you can go in to buy-to-let; there’s a whole cohort of “middle Britain” who will probably find that buy-to-let is too much to take on.

EH: That brings us nicely on to short-term goals versus long-term needs. Maria, how can you make sure advisers are looking to the long-term when thinking about retirement income rather than just focusing on an exciting short-term buy-to-let property?

MM: I think again that it relates very much to the trust between the adviser and his client and their relationship. It’s important but sometimes difficult for individual clients to look for long-term goals. It’s very difficult to portray themselves as being older people in need of retirement. With the reality that actually they’re going to live a lot longer than their parents or grandparents, this is becoming very important and again the role of advisers can’t be stressed enough.

EH: Billy, do you think education is enough or are people put off by the reality? Is it more about tapping into their aspirations?

BB: Education is good but it’s engagement [you need]. The way I do it is to say to people, look, you’re between a rock and a hard place. Low interest rates, volatile stock markets, you don’t know how long you’re going to live, what’s going to happen to inflation or the stock market, what’s going to happen to your personal circumstances and your health. So I think people will take a longer-term view if they’re encouraged to engage. They owe it to themselves to get it right.

EH: A question has come in from Chris Wheatman, given that there will be more pension changes post the general election, should top earners be investing more now to maximise tax relief? Robin, what do you think?

RE: I don’t know who’s going to get in, but whoever gets in there are going to be changes to the pension system. Ever since it was announced 10 years ago that the pension system was going to be stable for the next 30 years we’ve had changes virtually every year, sometimes two or three times per year. So, yes, there are going to be changes.

Where they’re going to go is hard to say, except that the thrust of all political parties is to move away from long-term planning into short-term planning.

They’re trying to encourage people – I think wrongly – into pensions as a short-term thing to deal with rather than worry about how long they’re going to live. It is a good question but the thing to anticipate is that the thrust of government planning is to cut pension benefit reliefs, tax reliefs, and to encourage people to think that pensions as savings rather than protection against living too long.

EH: Obviously there’s been a lot of talk about just the name ‘pensions’. Do you feel that pensions are now discredited? Will people favour other products just because they don’t have the pensions label?

BB: I’m quite optimistic about the future of pensions, mainly because of auto-enrolment. Certainly as an individual, if your employer is making contributions why wouldn’t you match them? That’s going to be the shift, there may be more money in DC pensions rather than in a personal pension. But there’s going to be a good future.

RE: I’d agree, I think there’s a short-term hiccup. Pensions, annuities, all those sorts of words really frighten people off, but the government’s not doing the right things to encourage people in. Over time people are really going to start getting worked up, as they start seeing their parents struggling financially, which will make them think about how they’re going to manage in older age. Pensions will become sexy again but it may take a few years.

MM: Pensions will remain a core part of providing for retirement. The freedom that we are enabling ourselves in the next few years will allow new products and allow some diversification, but these will always depend on the characteristics and needs of each single client, and again advisers are a very important aspect of this.

EH: That’s great. Thank you to the panel. Clearly challenging times are ahead for clients who we need to get focused on thinking not just about today, but retirement income in the many years to come. Thanks to our panel, Billy, Robin and Maria for providing their insights.