The Baby Boomers have arrived and it’s into a perfect storm that they have stumbled. The largest demographic in the UK is entering the “at retirement” market at the same time as financial advice is being rationed and yield assets are being suppressed. It really is a perfect storm and I’ll try and explain how the moving parts involved have created this situation.
There are four key factors at work that have created a very difficult mixture for people currently at retirement age.
1. Price and availability of financial advice
In January 2012 the Retail Distribution Review (RDR) went live in the UK. The RDR was an attempt to strip commission structures out of the investment market.
That commendable aim had the unintended consequence of also raising costs for financial advisers and stripping cross-subsidies out of their business models. Without those cross-subsidies (i.e. larger client subsidises smaller client), the effect is a considerable advice gap for clients who are most likely to need advice.
2. George Osborne’s new pension flexibility
The cynic would suggest that these rule changes were designed to trigger large-scale pension withdrawals and increase receipts to the treasury rather than give the people of the UK more choice in how they fund their retirement.
True or not, we have a new set of interim rules ending 6 April and then we’re into a new regime of pension flexibility. Anyone who thought this was a pension-simplification regime had better take a closer look. The options now available to the “at retirement” client are more complex than ever with the consequences of choices being more divergent over longer periods of time. Errors are going to be compounded.
3. Demographics and medical science
Medical science is getting mighty good at keeping us going for longer and recent studies have suggested the first person who will live to 150 has already been born. The retirement timeline is growing each year.
You might agree that the consumption expectations of today’s “lifestyle generation” of retirees is somewhat more elevated than the generation before.
4. Financial repression
We’re living in an era of low-to-negative yields on income assets. As we need to fund longer retirement periods, we need to save more. However, those at retirement now don’t have that luxury. They need to think about preserving capital to produce an income.
However, without doing the maths, I think we can all understand that when capital yields 1.5% instead of 5% you’re going to start digging into your capital far sooner.
The only way to counter this low-yield problem is to move up the risk curve and buy risker and riskier assets - the need for yield gets lost in a hope for growth. In this way, we now risk the capital, and that’s what is happening in the investment world right now.
It’s that effect that allows quantitative easing (QE) to drive up stock market prices. Ask any investment manager about the challenges or running cautious portfolios in today’s world.
We also know that financial markets are as fragile, or even more so, than they were prior to the 2008financial crisis. Much of the required reform has only been partially completed and the rescue boats have been burned in a veritable QE bonfire.
The factors mentioned above are interacting and in many instances are mutually reinforcing. Getting clear sound financial advice on your retirement options has always been important, now it’s indispensable.
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