In the third of the accounts of the WealthBriefing London Summit of 30 April, this report focuses on a discussion around recent high-profile pension reforms that affect the wealth industry.
Jones of Coutts was upbeat about the changes to the rules.
“It has become relatively simple…it (the pensions world) is getting even better. The old 55 per cent tax on top of a pension with drawdown has gone…that helps the inheritability of pensions,” he continued.
“The really significant change is the idea of non-dependency in pensions. Now, you can leave pensions to anyone you like. You can leave it to friends, cousins, and so on. It can only help people who can afford not to draw down on their pension. For those who can afford to draw money from a pension, the changes are quite remarkable. Already, it is changing behaviour,” Jones continued.
“We already plan for intergenerational investment….this (pension reform) adds a whole new aspect. The big pension funds have to match liabilities 30 to 40 years’ ahead and they have got that expertise. A private office, where people understand a whole family’s needs…they understand what is going on,” he said.
“There are a lot of people who will not take advice and it is hard to add value to people from advice where that wealth isn’t high enough…this is a massive issue and there are a huge swathe of people who could do with advice but can’t or won’t pay for it,” Jones added.
Lombard Odier’s Storno said wealth management has a lot to add to persons dealing with the new freedoms in terms of planning. “You need to understand tax but also talk about products and investments,” Storno said, adding: “If you have got advice for the long term then you need to stick to it...Short term change is where you can lose a lot of money. There is today a lot of pressure to change all the time.”
Roxburgh of BITA Risk said that understanding the implications of the reforms for individuals depended a great deal on the level of wealth.
“If you have more than enough wealth to fund your retirement, the tax changes are key, however there is a very large majority with low or borderline pension funding for whom the balancing of risks of investing, drawdown and lifestyle is critical to understand,” he said, continuing: “There is uncertainty over each element in this equation: market returns, lifespan and income requirements, even over the short term let alone the long time horizon over which a pension will be drawn down.
“If you are looking at 10 to 20 years out, market conditions will change…you are going to have to be flexible over what you do with your portfolio. As you look to go through 20 to 30 years of retirement, then it is a question of `what are my requirements and how are they going to change and who will manage my portfolio through this?’” he said.
“With annuities there was some certainty at retirement about the income you would receive…but now you need an understanding of the risks, which are not just market, but inflation, liquidity, longevity and sequencing and how these interact,” Roxburgh continued.
Technology can help in modelling and understanding the impact of factors such as longevity, inflation and market risk, he said, as well as the interaction between them, providing a test of the level of funding required. Another risk is what he referred to as “sequencing risk” – it is often not clear when the bad years in a market will come. Volatility can be magnified if a person draws down from a fund during a down-market. “Technology can help to crash-test an investment approach aiding the advisor and client (to) know what is possible,” he said.
Vestra Wealth’s Lane said a key issue that the industry must grasp is how people underestimate their lifespan.
“People drawing money in lump sums may not get as much money as they anticipate. Pension providers may need an idea of how much tax to deduct. People might be taxed at source more than they were expecting and may have to claw that back,” he said.
“If there are individuals who won’t or cannot pay for advice then the government will need to step in. This should be free at the point of demand,” Lane added.