How Covid shaped my clients' attitude to pensions

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How Covid shaped my clients' attitude to pensions

Income generation has become difficult over the past year or so thanks to dividend cuts, commercial property fund suspensions and low interest rates, which has hit clients hard this year. But the problem of generating income will persist for a while yet.

This is the view of Tim Morris, IFA at Russell & Co, who spoke to FTAdviser In Focus about Covid-19, the contraction in dividend income and the need for advisers to continually bust myths that clients hold about how they are funding their retirement.

FTAdviser: How has Covid-19 shaped your clients' attitude to risk and return in their pension pots?

Tim Morris: I’ve found that the rapid fall followed swiftly by a recovery has seen some clients willing to take on additional risk.

This is very different to the last time I experienced a drop in the markets of the same magnitude back in the global financial crisis – the difference was how quickly the stock markets recovered.

I’m sure if the value of their investments had not recovered six months later, some clients may have been more reluctant to take on risk.

There can be a massive disconnect between what clients have and what they want

FTA: Are they concerned about contracting income streams, such as the recent dividend cuts and persistently low interest rates?

TM: This is a very different issue and one which will persist for longer. Low interest rates have been around for more than a decade now. Everyone with cash savings post-2010 has seen the value of their cash eroded in real terms.

This is a challenge as many companies are delaying reinstating their dividends until the economy has fully reopened. We saw banks' results increase massively and the expectation is another good set of quarterly results this summer should see them starting to pay dividends again.

That will help equity income investors. In the meantime, seeking alternative sources of income such as infrastructure has helped. Commercial property certainly hasn’t been a good diversifier in the past 12 months.

FTA: What sort of myths about income do you have to bust as an adviser?

TM: If I had a penny for every time I’ve heard the phrase 'my property is my pension' – actually, I wouldn’t be very rich. Probably why I’m in a get-rich-slowly job. Anyway, back to the point.

Over the years, I’ve met countless business owners who have the attitude that their business is their pension. Yet when you ask them to quantify the main value in their business, the majority of the time they are the business – regardless of them operating through a limited company.

Another myth is that only wealthy investors do well from the stock market. Often this stems from getting their fingers burned through do-it-yourself investing, or simply how someone thinks about their wealth.

We tend to focus on big numbers being desirable. While a large number may provide security, this is often relative to what they earn and spend. While 5 per cent growth on £1,000,000 may look impressive, if that person has been used to earning £100,000 a year, the pot may not be growing sufficiently to meet their needs.

Conversely, someone with £100,000 who earned £10,000 a year may find that 5 per cent growth figure looks less impressive, yet they could manage better on that than the higher earner who may have been less prudent with their spending.

This is where cash flow planning is beneficial. It shows people how much is enough for their retirement.

FTA: How are clients expected to generate income without incurring big charges?

TM: When it comes to equities, passive and exchange-traded funds often don’t cater well for income investors. However, for me, the benefits of a fund manager are very much integral to this style.

And I don’t have an issue with clients paying more for a service if it delivers the desired outcome. If a client has a strong conviction for low-cost funds, I will recommend a passive portfolio. If not, I tend to recommend a blend of active and passive funds.

And for those who are cost conscious, I have split their allocation to certain sectors between a passive fund and an active fund with a strong track record of long-term outperformance. They have seen first-hand there can be a clear benefit of paying additional charges to generate alpha.

FTA: Is there a disconnect about what clients should actually expect to live on in retirement, and what they think they are getting?

TM: In my experience, there can be a massive disconnect between what clients have and what they want. What they need may be different again.

Some clients tend to forecast very well themselves. This tends to be those from an analytical background such as someone in finance, an analyst, or engineer. The majority, no matter how smart and successful they are, often aren’t fully aware of what they have or need for retirement.

This is where cash flow planning projections can help put a number to it. It certainly comes across as more scientific than using a rule of thumb, such as trying to replace 50 per cent of your salary.

That very likely won’t be enough even for a 45 per cent taxpayer.

Simoney Kyriakou is senior editor of FTAdviser