I attended a couple of seminars recently, and the common theme running through them was retirement – or decumulation, as we now call it.
The focus on this area of the market is not an enormous surprise. Practically all the money invested by retail customers is held by over-50s, and with rapidly increasing lifespans, this money is going to have to last an awfully long time. Scary.
One of the discussions we had in the seminars concerned the role annuities could play in retirement planning. My exact response was: “I wouldn’t touch annuities with a barge pole.”
I didn’t say it to be provocative, but rather because it reflects my view of reality. The annuity itself tends to be invested in something like gilts to provide long-term guarantees, and the investor’s biggest enemy – by far – is inflation, or the risk of it.
Consider a pension pot of £100,000, which is probably on the high side on average. The rates for a joint-life annuity at age 65 will achieve an annuity of about £5,500. But say inflation is 5 per cent: in 10 years’ time, the income will be worth roughly £3,400; in 20 years’ time, this will be just more than £2,000. Inflation at 8 per cent, meanwhile, would reduce the 20-year figure to roughly £1,200 – and the chances are that at least one of the couple might well be around in 20 years’ time.
Some may view these rates of inflation as high, but the fact is that a fixed-income investment is not a smart thing for a long-term investment, particularly if the choice cannot be reversed.
Another part of the problem is that we often define risk as volatility. One seminar contributor made the interesting comment that “volatility is my friend, not my enemy”. I empathise with this. All my own money is invested in equities in one form or another. Personally, I regard this as low risk for a long-term investment, but using volatility as a measure of risk would give a high risk rating.
Indeed, as another commenter said, the real risk for those in retirement is the risk of ruin – the risk that their money will run out.
So, what is the way forward? To start with, most people I speak to look at assets outside their pension plan to provide retirement income, such as property and Isas. With the increase in the Isa allowance to £30,000 per annum for couples, this is becoming a major factor in retirement planning.
People also tend to look to run down their working life gradually, taking on part-time work or a career change, rather take a single leap into being ‘retired’.
What we are seeing is much greater use of ‘lifestyle’ or ‘cashflow’ modelling tools to gather all of a client’s assets on one side and on the other their long-term aspirations, which would seem to me to represent a very sensible way forward in the modern environment.
