Everything begins to change, according to Vincent McEntegart, when a client hits 60.
But while the need for good financial planning has never changed, Mr McEntegart – who runs the £800m Kames Diversified Monthly Income fund – says the sort of advice given has changed over recent years.
According to Mr McEntegart, it used to be the case that if an advised client was five years away from retirement, which at one time would have occurred at the age of 60, then the prudent thing to do would be to move the client into safe-haven government bonds.
He says: “The idea was, if the client was retiring in five years, then they would be buying an annuity at that point, and because an annuity is a bond-like product, the sensible thing to do was move the client to bonds.”
However, things have changed. He says: “With annuity rates now so low, and people living longer, annuities are not really an option for a lot of people, yet the advice remains to go into bonds as soon as they near retirement, even though an annuity isn’t going to be purchased.”
- The rise in life expectancy and fall in annuity rates mean the advice to buy an annuity at retirement needs to change
- Government bonds should no longer be considered the default haven for those approaching retirement
- A low-risk exposure could mean a failure to meet a client’s objectives
Annuity rates are calculated based on the prevailing interest rate of the day and the anticipated life expectancy of the client. But with interest rates at record lows and life expectancies now much longer, annuity rates have fallen sharply.
Mike Coop, investment manager at Morningstar, says: “While one can make lifestyle choices and work longer, one cannot defy market ‘gravity’. A 40-year-old today has a life expectancy in the mid-80s and a one-in-four chance of living to be 100.
“In that situation, the major risk is inflation, and this necessitates looking at the allocations one might have had to defensive bonds.”
Government bonds are generally viewed as a defensive asset class because, historically, they have tended to go up when equities have gone down, offering a measure of safety during periods of market strife.
For example, during the pandemic-induced sell-off in March, government bonds rose while equities fell. Gold also rose during that time.
But during the nadir of the Credit Crisis, all assets fell together. And in the decade since the financial crisis, bond prices rose sharply, alongside equities, while the income yields dropped far below the rate of inflation.
James Klempster, investment director at multi-asset fund house MGIM, says: “If the aim is to preserve capital and nothing else, then it makes sense to own bonds – but unless you have a large pot of wealth, you are going to need other asset classes.
“The way the advice process interacts with this is, it examines the client’s ability to take risk and appetite to take risk.”