Whilst dealing with market volatility isn’t new, considering how it might impact customers in a post pension freedoms world is. This is uncharted territory for us all – clients, advisers and providers. For clients in the crucial years nearing or in retirement, it is increasingly important that we as an industry meet this challenge by providing innovative solutions and resilient investment strategies.
In a post pension freedoms world clients approaching retirement will generally fall into one of three groups:
- Wealthy clients with millions in their pension pot will feasibly be able to live off the income and pass on a substantial amount at the end of their life.
- Those with smaller pots of tens of thousands will likely take this through two or three lump sums rather than invest.
- It’s the mass affluent group in the middle, for example with a pot of around £300,000, which will need more complex planning. This is a substantial amount of money for a comfortable retirement but could easily be spent in its entirety. A substantial fall in asset value for this group could mean the difference between an enjoyable retirement and potentially running out of money
It’s this last group where we need to make sure the right investment strategy is in place to protect their fund from market volatility. The advice given to this group can have a huge impact on their outcomes, and it is my belief that both advisers and providers will be judged in 10 years’ time on how well we served these clients.
Recommending the most appropriate strategy and choice of investments to help clients isn’t simple. Investment returns are impacted by many external factors and prolonged periods of economic and market uncertainty, fuelled by global trade wars and Brexit, do little to help.
Although advisers can tailor recommendations to match a client’s goals, time horizon and attitude to risk, history shows us how crucial timing can be. Over the course of a medium to long-term investment there will inevitably be peaks and troughs of performance.
Markets tend to fall quickly and rise slowly. It can be a long road back, as the maths of percentages highlights the damage losses can do to a portfolio, made worse by income withdrawal. Get the timing right and the adviser is a hero, but if the need to access the investment coincides with a dip in the markets, they are likely, however unjustified, to quickly become the villain of the piece!
So what? None of this will come as news to advisers. Today, with global growth slowing, and market volatility on the rise, inherent investment risks are of increasing concern. Unsurprisingly, 48% of advisers surveyed identified investment volatility and 41% identified sequencing risk as key concerns for clients at or in retirement*.
What’s more, the regulator is placing sharpened focus on product and investment suitability. Advisers need to research, understand and qualify how exposed the recommended solution is to macroeconomic risks.
This perfect storm is resulting in advisers and their clients looking for higher degrees of confidence and certainty in their investments.
What is the answer?
For the mass affluent, retirement is likely to last for anything up to 30 years, during which their savings and assets will need to secure an income and provide for later life care. An unexpected fall in value on their pension fund is likely to hit hard. With this in mind, it is not only understandable that financial advisers are telling us that their clients are seeking a mix of lower-risk investments but also that many of those clients are staggering their retirements, either continuing to work part-time or take other forms of income, while leaving the majority of their pension invested**.
Retiring at 60 would mean an expensive first few years as income will not be bolstered by the State Pension. Delaying retirement by say seven years, would mean a further seven years of contributions, plus less of a need to enter drawdown, as at 67 the State Pension will already be providing a level of income.
Alternatively, better protecting funds with smoothed investments could help. Although not a new concept, a number of modern offerings are now available and are more simple and transparent than the opaque versions of the past.
How might it help?
Many clients – particularly those around the retirement phase – could find the sustained emotional stress of volatile markets too uncomfortable. Given this, they may welcome a proposition that, whilst still aiming for good investment returns, is specifically designed to help smooth out the effects of short term market movements that might otherwise suddenly reduce the value of their retirement fund.
Feeling confident that the worst of any downside risk is limited is likely to go a long way to reducing rollercoaster stress levels and allowing them to look forward to their future with confidence.
Also, the impact of smoothing clients can withdraw their money when they need it. They don’t have to worry so much about market movements and timing.
What can we do?
Helping ensure the best outcome for clients’ retirement is our focus, especially serving those in the mass affluent group with more complex planning needs. We want to help customers live with confidence, making the most of their money by ensuring their funds and investment strategy is resilient. We also need to ensure they understand how much they can spend and protect against knockdowns in the early drawdown phase.
At LV=, we believe smoothed funds are well worth consideration in your retirement planning conversations. Especially with clients who would welcome the potential for greater consistency and some emotional comfort to help them along their investment journey.
This article has been written by
Clive Bolton, Managing Director Life & Pensions at LV=
Sources
* AKG Pension Freedom Report ‘Grasping the nettle’ 2018
** Research conducted by Opinium on behalf of LV= between 27 June and 3 July 2019 among 1,004 UK adults aged 50+ with a DC pension and 206 Independent Financial Advisers.
