Monthly Archives: June 2016

The Impact Of The EU Referendum – Some Personal Thoughts

With just two days to go until the big EU vote, many clients have asked what my own views are on the potential for the UK to leave the European Union. I suspect what they are probably most concerned with is ‘what will the impact on the markets be?’.

I should stress that these are my own personal views on the possible outcomes following the vote. I shall try not to get too political here and keep this focused on the financials.

What is already clear, is that ‘the market’ most certainly favours the UK remaining in the EU. Just yesterday, we saw the FTSE 100 gain over 3%, just on news that momentum seemed to be shifting back in the direction of the remain camp. Despite the leave side seeming to gain an advantage in recent weeks, my view is that ‘the market’ still expects a remain vote to a certain extent.

So, what does this all mean? Well, in the event that we remain in the EU, I would not be surprised to see major stock markets jump by 3-4% on Friday. What follows is largely unknown, however one can assume that it will be more of the same status quo for the time being.

In the event of a leave vote, I suspect that the markets will fall by a similar margin, if not more severely. What is less certain is what the weeks, months and years that follow will hold for us. You see the market, just like the human brain, really hates uncertainty. Once an outcome is known however, the market (just like the brain) can adapt to this new set of circumstances and start formulating solutions to any problems.

I certainly know that this is true when facing an issue in my own business or life. When the outcome is unknown, the uncertainly can tie you up in knots, however once I know what the future holds, even if the outcome is negative, the brain goes to work on formulating solutions.

With this said, I don’t think anyone really knows what the longer term future will hold in the event of a vote to leave (the same of course could be said about remain). While various think tanks and economic commentators have created countless models and predictions, in reality, I think it is all guess work.

The EU is such a colossal ‘thing’, that I don’t think any one person or body can fully appreciate the implications of leaving the EU over the next 10 days, let alone the next 10 years.

My own view is that the UK will survive and thrive in the longer term, whatever the outcome, however in the short term, the safest bet, especially where the markets are concerned, would be remain.

Income In Retirement – A Shift In Thinking

With the new pension freedoms legislation now firmly part of the retirement planning landscape in the UK, the true implications of these changes are now starting to be truly understood.

What is clear in our day-to-day work with clients’, is that the pension investment landscape (that is, the investment funds that we hold within our pensions) has not quite caught up with the reality of this brave new world.

For a start, we come across clients who are invested in so called ‘lifestyle’ funds on an almost daily basis. These investment strategies gradually pull people out of ‘risk assets’ such as equities and property and move them into ‘safer assets’ such as cash and bonds as they approach retirement.

The problem with this strategy is that it is entirely founded on the basis that most people purchased an annuity at the end of their working life. As such, the funds would be de-risked as the day of retirement approached. The intention being that there would be less risk of the fund falling sharply in value shortly before annuity purchase, when there would be insufficient time to make back any losses.

While this strategy was sound in a world where a good majority of people bought an annuity with their retirement savings, since the introduction of pension freedoms, this appears to be far less common. The figures vary but annuity sales have almost certainly had a significant fall, with one major provider reporting a 75% drop since the pension freedoms announcement. This leads us to the conclusion that many more people are choosing to draw an income from their fund, otherwise known as Flexi-access drawdown.

If someone is invested in a lifestyle fund, but then decides to take an income from the fund over the coming years, rather than purchase an annuity, the investments could have been pulled out of ‘growth assets’ just when growth is needed the most.

If the Flexi-access drawdown option is chosen, a shift of investment thinking is required as the pension funds accumulated will remain invested, possibly for the next 20, 30 or even 40 years. As such, we would suggest that anyone thinking of taking an income from their pension fund directly, rather than purchase an annuity, seriously consider how appropriate the investments held within their pensions are.

It could well be that the perfect investment strategy in the ‘old’ pension world, leads to the perfect storm in the new one.

We also come across many people who review and manage their other investments on an almost daily basis, but who have not reviewed their pension investments for 20 years or more. The days of the pension being a ‘set and forget’ investment could now be truly behind us and we would encourage people to consider pension investments as active, just like any other.

In the next article, we will look at how the consistency of returns is now more important than ever in the new pension landscape.