For financial professionals only
FCA’s ‘Consumer Duty’
July 2022 should see the publication of the FCA’s rules surrounding the Consumer Duty (1). Firms are not expected to fully implement until 30 April 2023 but because the regulator’s goal is a shift in consumer protection and firms will need to plan deep changes in business oversight, it’s worth preparing early for this work. Expect to be considering the issue of value for money around advice on drawdown.
‘Stronger nudge’ to Pension Wise
The unintended consequences of Pensions Freedom continue to concern the regulator. Their data on how people who don’t take advice are handling their retirement savings – basically leaving it in cash or spending it – has pushed the regulator to introduce a ‘stronger nudge’ for people to consult Pension Wise (2). This may prove an unwelcome distraction for advisers as they have to suffer an unnecessary complication in their process.
The pandemic has led to over 170,000 deaths in the UK since March 2021, in a time where the number of deaths from all causes was expected to be over a million. Strangely the number of ‘excess deaths’ in England and Wales has recently been negative, with fewer deaths than might have been expected in recent ONS reporting (3). The advised community, who make up under 10% of the population, have felt the impact less than disadvantaged sections of society. Given that ONS statistics will soon pick up the Covid effect in its historic analysis, analysis based on the lives of affluent people is considerably more valuable to advisers (4). Parmenion supplies postcode specific longevity data from Club Vita in our Income Manager Tool (IMT), including % chances of living to 110.
At the start of the new year, cash flow modellers will be revising their forward looking expectations of portfolio returns, with a keen eye to the near term, given that a lot of cases are focused on the ‘At Retirement’ context. Reviewing outputs from Vanguard, JP Morgan, and Invesco, point to returns over the medium term, say around the next 5 years, well below the outcomes for recent years (5). Here are Vanguard’s expectations for the next decade (6).
Deterministic modellers can also pick up Hymans Robertson’s median outcome expectations, after the impact of inflation, from IMT where stochastic modellers can also see a range of outcomes at different levels of probability.
Transient or persistent? Whatever the outcome this year, financial plans will need to be tweaked. Retired people spend more time at home and with energy costs jumping, estimates for 2022’s heating bills are likely to need a closer look ahead of price cap arrangements likely changing in April (7). Offsetting adjustments from less travel, less entertaining and fewer holidays may be material as well.
Tax and Benefits
The State Pension is set to rise by 3.1% in April 2022 (8). At the same time the Personal Allowance will be frozen in £ terms, an effective tax impact on spending power of £75 (20% x 3% x £12,570) for anyone paying basic rate tax and anyone into higher rates will see an effective impact of £300 (20% x 3% x £50,270), putting extra pressure on the spending budget.
As deposit rates remain stubbornly low, holding a higher cash balance is a strategy prone to the loss of purchasing power in an inflationary environment. The best rate from NS&I is currently 1.5% for Junior Cash ISAs, with Premium Bonds offering 1% and Green Bonds 0.65% (9). Very low risk portfolio returns would seem to offer strong competition to a strategy of leaving unspent wealth in cash where the risk appetite is there to support that switch.
With long term interest rates still relatively depressed it is not surprising that guaranteed income is expensive. The indicative rate for a 65 year old is now above 5%, against the low of 4.7% reached in 2016, but still 2% below the levels last seen before the financial crisis (10). But a personalised annuity rate remains a very useful withdrawal risk benchmark for planners to consider. To illustrate, standard single life rates for a 75 year old are now close to 7% which is a challenging return target for a woman in good health and in a prosperous postcode, without sufficient secure income, with a low appetite for risk or low capacity for loss, given her median life expectancy of 92 (to see Club Vita data use IMT), in the context of likely available returns.
Treasury receipts from Inheritance Tax continue to rise in a context of buoyant house prices and stock markets (11).
A very substantial proportion of capital held under advice for retired people is either specifically or loosely identified as legacy money. The primary focus is, of course, on mitigation of tax through prudent planning and utilisation of reliefs such as the income tax reliefs available to a recipient of a pension contribution made by a parent to their adult offspring. This can also be used to reduce income assessable for High Income Child Benefit Charge(12). But the secondary focuses, how should the money be invested and at what risk grade are both worth reconsideration. 2022 is a big year for ESG investing, with advisers likely to be prompted by regulation to look at addressing climate change, as suggested in November by the FCA (13). For those with a longer investment horizon, a conversation around bond/equity composition in legacy asset portfolios should be taken up to ensure the financial planning objective is most likely to be met, in this new investment context in which we find ourselves.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.