News

Royal London recently published a report on the value of financial advice, this was based on the findings by the International Longevity Centre, who conducted this research on Royal London’s behalf. The results were quite interesting, and support what we already know and our company’s values.

As we know, in an ageing society its important that people are able to plan for their ‘financial security’ in retirement.

In the UK, there are a number of problems relating to the provision of an adequate income in retirement.

The ageing population means that less people are paying tax and national insurance contributions than the current working population, which adds strain to the provision of State Pensions (meaning the benefits could be reduced and the ages deferred).

This along with the fact that the State Pension is unlikely to provide an adequate income alone, highlights the need for private provision.

Another issue of the ageing population is that people are more likely to need their pension/investment assets to last longer.

The volatile markets are also a key issue and financial advice can help navigate around these issues.

The report published demonstrated that expert advice provided by financial advisers delivers real value in improving peoples financial positions.

There is widespread evidence of people failing to plan and save for retirement, participate in the stock market and to diversify their investments appropriately.

An ongoing relationship with a financial adviser has been demonstrated to help in each of these areas.

Receiving professional financial advice between 2001 and 2006 resulted in an increased wealth of £47,706 in 2014/16 (in pensions and investments).

The evidence suggests that an ongoing service provided by a financial adviser leads to better financial outcomes, and those who receive financial advice have nearly 50% higher average pension assets than those who only received ‘one off’ advice (from data complied in 2001/2006 and again in 2014/2016).

The findings clearly demonstrate that financial advice from professionals is valuable to individuals and there is potential for a wider group of people to benefit from advice than do so currently.

Andrew Lloyd 31/01/2020

Data Source: Royal London/ILC: ‘What its worth, revisiting the value of financial advice’ report, published December 2019. The International Longevity Centre (ILC) is the UK’s specialist think tank on the impact of longevity on society.

Investors expect to take ‘10.30%’ a year from retirement savings

According to a new recent global study, namely the ‘Schroders Global Investor Study 2019’, investors believe the will be able to withdraw, on average, 10.30% a year from their retirement savings without running out of funds (based on 25,000.00 in 32 locations around the world).

Typical Industry Opinion

It was argued in the early 1990’s that 4% should be considered a safe withdrawal rate for drawing an income from retirement assets, this came to be known as the ‘4% rule’. However, the 4% rule did not account for the effect of ongoing charges within the relevant pension product. There has since been numerous debates suggesting that the safe withdrawal rate is actually somewhere in the region of between 2 – 4% a year.

According to an article published by The Guardian on 28/09/2019, it states that the average pension pot at retirement is valued at £61,897.00. If we apply the safe withdrawal rate of between 2 – 4% a year, this means that the average income generated from a pension from a sustainable point of view would between £1,237.94 and £2,475.88. You have to ask yourself, could you realistically live on this level of income in retirement?

If you were to apply the investors expected withdrawal rate of 10.30% a year, this would give you an income of £6,375.39 a year. This obviously looks a little bit more appealing than the industry standard, however, this level of income based on the average pension pot size at retirement is simply not sustainable over the long-term.

What does this all mean?

My observations from these publications indicates there is a real disconnect between investors and understanding the limitations of their pension savings. I would encourage you to review your total asset position and compare this to your desired lifestyle in retirement.

We are happy to help you plan for retirement and help you understand how achievable your goals are and what actions may need to be taken in order to help you meet these goals with confidence.

Everybody is different and your requirements unique. If you are reading this at a young age, the message I would take from it is you need to start paying a lot more into your pensions.

Carl Mitchell

21/11/2019

The Pension and Lifetime Savings Association

Retirement Living Standards

I’ve just been reading an industry article in today’s ‘New Model Adviser’.  This is a magazine for advisers by Citywire.  The article was headlined ‘UK adults in dark about retirement reality’.

As we work for most of our clients in both pensions and planning for retirement generally, I found the article interesting and thought I’d share some of the key data with you.  The Pensions and Lifetime Savings Association (PLSA) looked at retirement income needs.

The PLSA’s retirement income recommendations are as follows:

The article didn’t state if these are net or gross figures but looking at the figures, I would assume they are net.  Please note that these are figures for today and they would need inflation linking to any future retirement dates.

In terms of what people want from their retirement years these are the findings from another PLSA survey:

Respondents were allowed to select more than one answer.

Comment

Whilst the above is useful background information for ‘averages’ and ‘normal’ views in the UK based on this sample surveyed, I don’t think they are a useful guide for most of us.

Surely what you want depends on how you have lived, worked and earned throughout your working life?  If you have a great standard of living you wouldn’t want a minimal or even a moderate retirement lifestyle.

As this is the case you should look at your lifestyle now and decide what you would like in retirement.  The longer you have to plan and position yourself (or yourselves) tax efficiently for retirement the better.

It may just take a bit more planning now or you might need to look at your priorities and direct some more of your earned income/s into assets for your retirement.  Once you stop earning income most of us will live on our accrued assets (pension funds, cash, Stocks & Shares ISAs & other investments) for the rest of our lives.  You don’t want a shortfall!

Steve Speed

05/11/2019

PLSA data from New Model Adviser 04/11/2019

As investors, we’re all human. All individuals with our own characteristics, attitudes, beliefs and behavioural patterns. These different aspects affect our actions in day to day life in many ways to varying degrees. So why would we disregard ourselves as individuals when it comes to our behaviour in the investment market? The short answer is, we shouldn’t.

This belief has been reiterated lately in a report from Schroeders titled ‘The Bias of UK Investors That Could Lead to Lower Returns’. Over 23,000 investors have taken the Schroeders investIQ test with the aim of understanding these behavioural biases and how they affect investment actions and returns.

It was found that UK investors were most likely to suffer from what is known as ‘Ambiguity Aversion’. However, just because this is the most frequently occurring of the behavioural biases in the UK, doesn’t mean that we as investors should focus solely on controlling one behavioural bias. Each investor is human, and as humans we each have a unique combination of behavioural biases which make us individuals.

In a time when people are free to express themselves as individuals more than ever, psychology and a tailored appreciation of a person’s personality have become second nature. It is appropriate that this attitude is transferred into the world of investment. Below are the biases as listed by Schroeder:

Herd Bias: As humans we can be influenced by the thoughts and behaviours of those around us (The Herd). We tend to assume that the herd collectively knows something we don’t. As a result, we irrationally follow others, ignoring the information we have and what’s right for us as individuals.

Over Confidence: Overconfidence is the tendency to believe in yourself without considering factors beyond your control. This may lead you to overestimate your ability to make rational investment decisions. As a result, you might think investment markets cannot surprise you, you might take on more risk than necessary, and move investments around too frequently.

Ambiguity Aversion: Investors with ambiguity aversion tend to choose investments that will provide them with more of a known possible outcome over ones that are more uncertain. This could lead to investors taking less risk, which might lead to lower potential returns. However, taking on more risk is subject to greater losses.

Loss Aversion: Investors with loss aversion bias tend to feel losses more sharply than the equivalent gains. This can impact our ability to make rational decisions and we end up trying to avoid losses at all costs rather than logically considering the alternatives.

Projection: This is the tendency to believe that your current views, feelings and needs will stay the same over time although statistically this is highly unlikely.

Over Optimism: This is the tendency to overestimate the likelihood of success without focussing on any potential pitfalls. In investment terms, you may be too focussed on the positive potential outcomes and not realistically consider the possibility of incurring losses. As a result, you may take on more risk than you can sustain.

Anxiety: This is when you tend to be easily influenced by the short-term ups and downs of the market and feel compelled to take action. This may lead to irrational investment decisions that undermine your long-term financial objectives.

Regret Aversion: This is the fear that your decision will turn out to be wrong in hindsight. Your anticipation of feeling regret rules the choices you make and even when you’ve made a choice, you can still feel uncomfortable and you continue to dwell on your decision. The worry of not getting it right can also lead you to avoid taking any action altogether. In you desire to avoid regret, you may be tempted to follow the crowd, even if what others are doing isn’t appropriate to your circumstances. You believe that if things go wrong, you will have less regret if others have done the same.

Impulsivity: This is the tendency to focus on the here and now rather than the future and favour immediate rewards rather than future ones. For example, given the choice between receiving £100 today, or £120 in two weeks’ time, you would choose to have the money today. As a result, you can overvalue immediate rewards to the detriment of your long-term goals. In financial terms, this means you could find it difficult to change your short-term spending habits, in order to save sufficiently for the future.

Awareness of Behavioural Bias can now more than ever help us understand our clients as people. We can better manage and coach our clients to balance and control each of these behaviours and not allow them to affect investment performance. The overall goal is that investors feel fully satisfied that they have acted without unnecessary psychological hinderance and have maximised investment performance based on logical financial objectives.