It’s been a rocky week for the markets and for retail investors. Platforms and financial advisers tell us that sales were slow pre-referendum and things picked up in the days following the vote.
But advisers also tell us that they are getting a lot of enquiries from nervous clients and some are seeking to cash in. This nervousness was a key reason behind suspensions of several property funds this week. These funds can technically stay closed for up to 6 months.
The problem goes beyond those directly invested in property funds. We understand that many model portfolios that hold these suspended property funds are also suspended.
But we’ve been through this before. Some worry that this is the precursor to a market meltdown with bad memories of 2008. Others see this as a short term bump on a long road.
I was lucky enough to attend the @headlinemoney pensions dinner this week with Baroness Altmann (@rosaltmann) and Richard Parkin (@fidelity_UK) at which we all tried to take a long-term view.
Baroness Altmann reminded us that whatever is happening in the political and economic climate at the moment, pensioners are in a better position now than at anytime in the past.
Of particular interest to advisers exploring offering advice in the workplace, she reminded us that employees will be exempt from income tax and national insurance contributions on the cost of pensions advice up to £500 from April 2017. The advice will have to be arranged by the employer.
The government is also consulting on a new pensions advice allowance. This will allow defined contribution pension scheme members to draw up to £500 from their scheme before reaching age 55. The proposal is that such withdrawals will not trigger a tax liability.
She also urged employers to encourage auto escalation and challenged the pensions industry to better understand customers and to learn how to sell to customers.
This challenge to better understand the customer and to learn to sell to them struck a chord with me. At the dinner I asked the audience “how many of you have a clear idea of when you will retire?” Two hands went up in a room of 20. This is representative of the broader population. Only 1 in 10 working adults have a clear idea when they will retire.
But what is the first question you are asked to answer when you fill out an enrolment form for a pension or when you fiddle with a retirement income calculator? The age you will be when you retire is a deceptively difficult question to answer.
Just over one quarter of all working adults say they will work beyond the state retirement age – whether that be full time or part time. And the nearer people are to the state retirement age the more likely they are to say that they will work into retirement.
Retirement is a process over time rather than a one off event. How well do we know our customers? We should at least know enough not to ask them for a precise date when they will retire!
Another gap in customer understanding is in the ways that investors plan to fund their retirement.
When we ask investors the income sources they plan to rely on in retirement, they tell us they will rely on a variety of sources.
At Platforum, we think of retirement income sources as a pyramid with the base of that pyramid the workplace pension. We layer onto that the state pension, other savings and investments, property and inheritance.
Investors prioritise savings and investments and property ahead of the state pension and working beyond the state retirement age replaces inheritance among important income sources.
Retirement income calculators too often focus solely on pensions, savings and investments. We need to take into account property and whether the investor has a mortgage, when that will be paid off and if the investor will be paying rent in retirement, for example.
On this issue of housing, Baroness Altmann made an interesting observation. She suggested that our housing crisis comes from a crisis of supply for retirees. Those looking to downsize can’t find suitable housing and so stay in houses that are too big for them.
Perhaps Brexit will be the catalyst that breaks the British addiction to property. The commercial property market has crashed and perhaps now people will realise that housing is a risky – or at least illiquid – investment class.
Next week we will do an email dedicated to Brexit and its implications for financial advisers and investors. We will consider the impact of suspended property funds, business models that are likely to survive, the impact on platform revenues and early feedback on trading volumes. Send questions and comments our way on enquiries@platforum.co.uk.
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