Almost six in 10 (57 per cent) UK financial advisers expect an increase in the level of people squandering their pension pots after the Budget reforms take effect, a survey by Natixis Global Asset Management (NGAM) has found.
As of April 2015, retirees will be able to withdraw their entire pension pot as a lump sum, a right previously restricted to those with smaller pots only.
The survey of 300 UK financial advisers revealed that almost a quarter (23 per cent) expect a majority of their clients to withdraw their entire pension pots as a lump sum on retirement.
The pension and savings reforms in the Budget have handed substantial amounts of control to individuals over their retirement income, but concerns have been raised about how prepared investors are to meet this challenge.
A separate NGAM survey of 750 UK individual investors, conducted in May 2014, highlighted a significant lack of financial planning. Over half (54 per cent) of those surveyed admitted to not having any financial goals, and one in three savers (33 per cent) said they didn’t have a good understanding of the income they would need to live comfortably in retirement.
What’s more, given the increased levels of personal control over retirement investments implemented by the Budget, 79 per cent said they lack strong investment knowledge and nearly half (47 per cent) said they have little or no knowledge of investments that can produce a stable income in retirement.
Chris Jackson, executive vice president for UK retail and international product, says: “It is clear that many investors feel ill-equipped to make sure they have a comfortable retirement. The government and the financial community has a serious responsibility to ensure that people are setting goals for their retirement and developing realistic plans in order to meet them. Investors must have more support to understand what investments or further savings they need to meet their retirement income goals. The best way to do this is to work closely with a professional financial adviser.”
The research among UK financial advisers revealed falling levels of confidence about their clients’ investments in the current environment.
Only half (51 per cent) of advisers said they were very confident their clients’ current investment strategies were able to ensure appropriate diversification, down from three-quarters (75 per cent) in 2012.
Just under one-fifth (19 per cent) said they were very confident their clients current investments were able to preserve capital, down from two-fifths (40 per cent) in 2012.
Just over one-fifth (21 per cent) said they were very confident their clients’ current investments would be positioned to take advantage of bull market periods, down from over a half (52 per cent) in 2012.
Less than one-third (29 per cent) were very confident their clients investments would be able to protect against long-term inflation, down from 49 per cent in 2012.
Just over a fifth (23 per cent) said they were very confident their clients’ current investments would be able to provide steady income at retirement, compared with 57 per cent in 2012
Among those UK advisers surveyed, many indicated a need to reconsider traditional investment approaches. 44 per cent suggested that a traditional 60/40 stock/bond split is no longer the best way to pursue return and manage risk for most investors (against 17 per cent who disagreed). Likewise, a third (33 per cent) agreed that investors need to replace traditional diversification and portfolio construction techniques with new approaches to achieve results, while just 20 per cent disagreed.
Alternative investments (such as commodities, real estate or private equity) were viewed with caution; a fifth (20 per cent) say they use such strategies regularly, while 67 per cent say they use alternatives infrequently and 13 per cent never use them.
“UK financial advisers are finding that traditional approaches to portfolio construction just aren’t delivering the goods anymore,” says Jackson. “It is the responsibility of asset managers to ensure advisers are equipped with the tools they need to adjust their clients’ portfolios to meet the challenges posed by increasingly complex and volatile markets. Alternatives, for example, are an excellent way to diversify a portfolio as they can lower correlations, temper volatility and offer new sources of return.”
The good news is that post Budget, 72 per cent of advisers expect demand for their services to increase, reflecting a recognition from investors that they need help. However, despite the increasing need for professional financial advice, there remain serious concerns around its availability, particularly following the UK’s Retail Distribution Review that took effect at the start of 2013. Among the financial advisers surveyed by NGAM, nearly a third (31 per cent) reported that RDR had forced them to change the level of assets clients would need to engage their services, despite their advice being more crucial than ever.
Earlier this month, the Treasury Select Committee raised the alarm over the growing number of individuals, particularly those with lower levels of investable assets, who have been priced out of the market for financial advice.
With the increased levels of individual control over retirement savings due to come in to force in April 2015, the government has implemented a ‘Guidance Guarantee’ that aims to provide free and impartial guidance to individuals about their choices and investment options at retirement. However, the service is not individually tailored and does not provide personal recommendations, with decisions ultimately left in the hands of the individual.
“While the guidance guarantee is an encouraging first step towards bridging the advice gap, there is no real substitute for genuine financial advice,” says Jackson. “The government-sponsored guidance is unregulated and ‘off-the-shelf’, and will merely serve to help investors narrow their list of options rather than define a way forward based on their individual circumstances.
“Professional financial advisers must play a crucial role in order to ensure the Budget reforms prove a success, and there needs to be further dialogue with the adviser community to make the most of their expertise as part of the solution.”