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Pensions revolution: what it means to these seven wealth managers
by Libby Ashby on Mar 27, 2014 at 12:16
Last week's Budget opened a range of potential opportunities for wealth managers. We find out how excited seven readers are about the changes.
A revolution for savers
Last week’s Budget was a real eye-opener.
Two of the measures which really got people going was overhaul of pensions and ISAs.
Under the new regime individuals will no longer be forced to buy an annuity on retirement, while in another boost for savers the ISA allowance was raised to £15,000. Chancellor George Osborne also said the government would set aside £20 million to help ‘bridge the advice gap’.
Analysts Bank of America Merrill Lynch and RBC believes the Budget creates a big opportunity for the wealth management industry.
How big is this opportunity? We ask seven wealth managers what they made of Osborne's Budget.
Pamela Reid: executive director, Quilter Cheviot, Bristol'We welcome the changes to the pensions so that there is less compulsion to buy annuities. This means that other options can be considered during retirement including keeping a Sipp fund invested to provide an income for a lifetime. With sensible planning and asset allocation, this could be a better outcome for many with Sipp and personal pensions.
The decrease in the annual allowance and life time allowance will have an impact for those putting aside the maximum they can in pensions, but this will only impact those in the higher rate or additional rate brackets. The rise of the ISA allowances and simplification of the allowances, is also welcomed and will mean savers will retain more of the benefits of their investment.
Both proposals offer significant opportunities for individuals to make provision for the longer term as well as maximise the tax efficiency of their investments. Investors in doubt as to what this means for them should consult their usual advisor.
Jonathan Baker: investment director, Charles Stanley, Leeds
I think again for middle England and voters this is great news to get people to put funds into pensions as it is no longer the case that you can't get your money out, with the recent changes with flexible drawdown could you do this anyway??
Tax efficient in the pension and tax relief on the way in has always been there, just need to remember that whilst you can get funds out anything over 25% will be taxed at your rate at the time. Interesting point how do you get this 'Free advice' they mentioned and will the advisor need the relevant RDR qualifications? Who provides it and how is the Wealth manager’s time calculated?
Again [you] need to remember simple economics of scale, you still need to put a great deal into a pension to get a reasonable pot out! Assume £200k pot take 25% TFC now £150k assume 20% taxpayer £120k pot interest rate in Bank 0.5% = £600 pa !! Equity return at 3% average decent yield only gives you £3,600 pa.
So whilst it sounds great in principle that you can get your pot out there is the simple fact that still remains you only get out what you put in in the first place and you need to plan this properly.
[Also] assurance companies may need to rethink their long term strategy on how they invest if clients can take full pots out at any time.
Daryl Grundy: head of investment management, Arjent, London
The change to the ISA rules is sensible as it allows us to have more flexibility on which asset class to hold within this tax-efficient wrapper, and will help simplify administration.
Regarding the changes to pension rules, many of our clients have benefited from similar flexibility under existing legislation, so there will be very little change to how we manage their assets under the new rules and we will still advise our clients on the level of draw-down we feel is sensible for their income needs and tax position.
Being able to take more out doesn't necessarily mean that is the right thing to do. Any increase in options for clients is a good thing but we must be mindful of the increasing longevity of our population, and we feel these new changes do reflect that.
One area of concern we have is the government's guarantee of a 'free' advice service for pensions from 2015. Who will provide this service? It's possible that this will be funded by a levy on pension providers and therefore this cost may be passed onto the client in higher charges.
Chris Kenny: investment management partner, Smith & Wiliamson, Dublin head
We broadly welcome the changes to pensions, and see this as an area of potential opportunity for people who would like to seek out available alternatives to annuities. However, as ever, the devil will be in the detail. Hopefully this will be the last of the changes to the way that pensions are handled for some time, giving the pensions system the chance to settle in without further upheaval.
The simplification of ISAs into NISAs is also a very positive change, and will at last allow for active asset allocation. There are, however, still some steps to go on successfully merging Child Trust Funds and Junior ISAs.
From a market point view, these changes are likely to be quite disruptive to the business models of UK insurers, pension providers and investment firms.'
Tony Yarrow: director & fund manager, Wise Investments, Chipping Norton, Oxfordshire
The abolition of the requirement to buy annuities is complex. The argument against doing so was always that if people could get their hands on their money, they would spend it, and then be once again dependent on the state. The Lib Dems, whose policy this is, argue that people should be trusted to take responsibility for their own lives, and in effect you shouldn’t deny freedoms merely because some people might abuse them.
One reason why annuity rates are so low is demographic. Annuity rates in the late 80s and early 90’s were much higher than they are now, partly because life expectations were lower then. Anyone who took out an annuity back 20 or 25 years ago, has done extremely well at the expense of the life companies, by outliving the life expectancy that was priced into their annuity.
Naturally, the insurers don’t want to get caught again, and for some years they have been offering annuities at rates at which it is almost impossible for them not to make profits.
In the last decade, our clients have, almost without exception, opted to take drawdown at retirement rather than purchasing annuities. The changes in the budget will therefore allow people with smaller funds to do what others are doing already, and give them a further option, which is to take the fund, and presumably invest it.
The choice facing the smaller saver is then, whether to take their pension fund as cash, or as drawdown, or as an annuity. In cash they still have to decide how to invest it, and interest rates are still very low. In drawdown they have to pay fees which are proportionally higher in a small fund, which is the reason why drawdown has always been a less attractive option for the smaller saver-and the budget doesn’t change this. The annuity option remains.
The question is therefore whether the new freedoms will actually result in any significant change in investors’ behaviour. I wonder whether we might see more attractive, or less unattractive annuity rates as an unlooked-for consequence of this Budget.
Stuart Leigh-Davies: branch manager, Redmayne Bentley, Windsor
I think the first thing to say here is Wow! Nobody saw that coming and I think the stock market’s reaction highlighted immediately what types of businesses would be the winners and losers in terms of the changes to pensions and ISAs when one saw the price reaction in the likes of Hargreaves Lansdown and Partnership Assurance to the chancellor’s statement.
Wealth managers will be clear beneficiaries and I would expect us as a firm to capitalise on both these changes by way of new enquiries from the baby boomer genre in particular who account for the majority of private wealth in the UK and face retirement in the next decade or so and also investors looking for flexibility in their ISA’s.
The former group especially will undoubtedly require professional advice or management with their investments and as a firm who offer a bespoke investment management service, we are well placed to provide these investors with a tailored service at a such a crucial point in their lives. Not all retirees will have the same requirements, that’s for certain.
Insofar as the new ISA or NISA is concerned, this is very much welcomed and will be good for our business from an investment management as well as a self-directed perspective, although I do believe the inclusion of the P2P lending products within an ISA to be a mistake.
In summary I think the wealth management industry will be pleased as punch but with fingers crossed that we are not faced with a new round of regulatory measures which could well cause confusion and eat into the potential returns of these annuity liberated retirees.
John Simpson: senior investment director, Investec, Manchester
The ISA allowance increase is a very welcome change to our business. For many clients an ever increasing amount of their wealth will flow into the tax free environment. But I suspect that a change of government may bring about a cap on the value of ISA portfolios – similar to the pension cap.
The removal of the annuity requirement for pensions has affected in the short term the business model of the life companies but will act as a tail wind for investment managers as clients increasingly wish to maintain the transparency on their wealth.