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The Urge to Splurge

Next April’s pensioners are still frightening advisers, a Natixis survey suggests


 

Don’t look now, but April is less than six months away. And, unless we’ve been missing something, the gushing torrent of activity in advance of the pension reform is proving to be a little less busy than we might have expected at this point in the transitional process.

That, of course, is a disgraceful slur on the tens of thousands of advisers who are working tirelessly around the clock to support their existing clients in advance of the change of regime in April 2015. But it’s not so very far wide of the mark for the majority of the population who don’t currently use an adviser – and who have probably become less likely to go down the adviser route since commission-only was scrapped in January 2013.

So What of the Orphans?

Of the 400,000 DC pension holders who’ll be retiring in the twelve months from April 2015, probably three quarters will set sail upon the ocean of new opportunity without anything more than the Guidance Guarantee advice from the government. Which isn’t really advice at all, of course – more of an explanation of the options and the priorities, which we can only hope they’ll understand when they get it.

Indeed, one of the problems we inevitably face, when looking at this issue, is that we don’t have much of a view of how the ordinary man or woman views the pensions issue. It’s only the people who currently use an adviser who we’re going to be able to poll, and probably to influence, in advance of the great day. That’s a significant statistical gap which we overlook at our peril.

Shock Tactics

Subject to that rather large caveat, some hard figures do seem to have emerged from the latest poll of UK advisers by Natixis Global Asset Management, which interviewed 300 UK adviser firms during June and July 2014. And it doesn’t sound good. A massive 23% of Natixis’s UK respondents declared that they expected a majority of their clients to withdraw their entire pension pots as a lump sum on retirement.

Pause for effect. Let’s remember here that we can safely assume that IFA clients include a sizeable proportion of the better-informed public, with generally larger than average pension pots. So if even those people are being expected to bolt for the exit doors, what are we to expect of their non-advised (or not-very-well advised) contemporaries?

On the one level, the Ferrari salesmen will be better advised not to whip out their notebooks too quickly. We’re all aware that most of next year’s new pensioners would be very poorly advised to grab everything in their pension pots immediately upon retirement. Once the first tax-free 25% has been drawn down, the remainder will be taxed at their marginal rate – which, for many, will mean that grabbing too much in any one year may send them into a higher tax band where they don’t need to be.

The Bank That Needs To Say Yes

On the other, however, the pressure on the newly retired to help fund the next-but-one generation’s first-home purchases is likely to prove substantial. And when you consider that many of the aforementioned grandchildren are currently stuck at home with their beleaguered parents – as 26% of 20-to-34 year-olds are currently doing (source: Office for National Statistics, January 2014) – then you can imagine that the newly-solvent Bank of Gran and Grandpa may get its arm more than usually twisted.

Good News, Bad News

Slightly less dramatic is the news that 57% of Natixis’s UK adviser sample said they expected at least “an increase in the level of people squandering their pension pots” after April. Indeed, it would seem to us to be a little naïve for the remaining 43% to expect anything else.

You’ll be glad to hear, then, that Natixis reckons the pension liberalisation will indeed bring new business for advisers. 72% of the 300 UK respondents said that they expect demand for their services to increase, because they think that investors will recognise that they need more help.

That would be fine, says Natixis, if it weren’t for the inconvenient fact that many advisers have scaled back their services to less affluent clients since RDR. 31% of respondents agreed that they had been obliged to adjust the asset levels at which clients would be able to engage their services. Indeed, from an operational point of view, we think it would be surprising if the proportion were as low as that.

The survey, as you’d expect, forms part of Natixis’s usual international adviser survey, which takes in 1,800 advisers from nine countries – 750 from continental Europe, 300 from the USA, and 150 each from Hong Kong, Singapore and the United Arab Emirates. And it’s excellent reading in its own right, although we should remind ourselves that its scope is global. You can read the report here.

So What Do the Investors Think?

Good question. For that, we need to turn to Natixis’s March 2014 survey of 750 UK individuals – all of them with a relatively high minimum net worth of US$200,000 (or PPP equivalent) of invested assets. So don’t expect any very good clues about the man in the street here.

Subject to that proviso, a rather shocking 54% of these wealthy respondents admitted to “not having any financial goals” (Natixis’s wording, not ours), and 33% said that they “didn’t have a good understanding of the income they would need to live comfortably in retirement”. 79% said they “lacked strong investment knowledge” and 47% said that they had “little or no knowledge of investments that can produce a stable income in retirement.”

Back To The Advisers

What do the 300 UK advisers think about this? Natixis’s survey is at least honest, even if it doesn’t manage to be encouraging.

  • “Only 51% of advisers” told the researchers that they were “very confident their clients’ current investment strategies were able to ensure appropriate diversification” – down from 75% in 2012.
  • Only 19% said they were “very confident their clients’ current investments were able to preserve capital” – down from 40% in 2012.
  • 21% said they were “very confident their clients’ current investments would be positioned to take advantage of bull market periods”, down from 52% in 2012.
  • Only 29% said they were “very confident their clients investments would be able to protect against long-term inflation” – down from 49% in 2012.
  • And just 23% said they were “very confident their clients’ current investments would be able to provide steady income at retirement” – compared with 57% in 2012.

So is that good news for advisers, or bad? Does it, perhaps, indicate that both clients and advisers are aware of the pension pitfalls – and of the tricky state of the current investment market? Does it, in fact, denote a healthy will to learn?

Or is it a collective shrug in the face of the unknowable – a situation where the consumer might feel that he might as well have a Jag in the garage as a 50-50 bet on an uncertain financial future?

Questions, questions. And only six months to go.

 

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