By the time you read this, tens of thousands of innocent words will have paid the ultimate price in the service of lauding, or deploring, or being all balanced about Chancellor Osborne’s April 2014 Budget. Never one to shirk the hard decisions, I thought we might send a few battalions more in as a second wave, now the dust has settled.
And as the scouts enter the field (I’ll stop now) this is what they find – confusion. Most in our industry are of the mind that increasing flexibility at the point of taking money back out of a pension (we are not going to use ‘decumulation’ in this article, except for that one time. Dammit.) and increasing ISA limits is a Good Thing. But with the Goodness of the Thing established, what do we do now?
Firstly, in terms of pension flexibility, we already know that the annuity market is in turmoil; as I write this one of the big specialist annuity providers is consulting on job cuts. With commentators in varying stages of confusion predicting falls of between 25% and 75% in that market, we need to start thinking about what will take its place. The Lamborghini chat is all very good fun, but unrealistic for many. And this is the point at which advice can step in (we’ll leave the commercials of advising certain clients aside for a moment).
If annuities have been a default solution for those approaching their third age, I’m pretty sure at least part of the reason why is that the alternatives have been so unattractive in tax terms. But now advisers and those offering other forms of guidance have a realistic alternative. I was always taught that one of the gold standards of advice was that you should be free to tell a client to do nothing rather than flogging a product for the sake of it. This takes that to an extreme – what if doing anything other than withdrawing your money in a oner is actually toxic? This is a complex area, particularly with those around the means-testing thresholds. Lots of money, albeit in small chunks, could flee the financial services ecosystem, including advisers’ income streams.
Jumping over to platforms for a moment, as I am wont to do, because it’s my column, not yours, and that’s the way it works, the situation might be quite opposite. I get asked a bit about the impact of pensions flexibility on platforms – especially at parties – and I think it will be positive. And because adviser and platform revenues still work pretty much in lockstep, it should be positive for advisers too.
For sure some money will flow out of SIPP wrappers on platforms and into kitchens, holidays, deposits for kids’ flats, university fees for the grandkids and all the rest. But equally, the percentage of outflow from platforms (and adviser trail streams) going to annuities should fall too. My contention is that the two will balance. Portfolio values will, of course, continue to decay for those taking money out, but across the book I’d be willing to lay a small wager with someone else’s money that the profile of that decay will be smoother and over a longer time. It won’t have the staccato punctuation of annuity purchase to the same extent – especially because advised platform clients should be at the more affluent end of the socio-demographic whatnot.
So, additional complexity but some potential additional revenue, too. The complexity, though, doesn’t stop with what action individuals might take. It extends into the suitability of platforms and pension products too. It is far from clear to me, as I look at the market, that all pension wrappers on platforms will be ready, willing or able to provide the flexibility clients may require.
Even if they do, costs for taking money back out vary widely depending on what you do. Providers of platforms and pensions might feel that cost isn’t that big an issue, but the truth is that the industry has treated those retiring as a highly profitable series of walking bags of money for a long time, and this is going to have to calm down a bit. We’ve seen providers like FundsNetwork reducing their charges recently (to zero in FNW’s case), and some providers are relatively enlightened; charging per client for drawdown rather than per crystallisation. Bear in mind that in a world where multiple crystallisations are likely to be increasingly common, that could save clients thousands; at least some of this will be available in fees.
And there’s nothing to say that on-platform products will be the most suitable. Looking across the market will be crucial. If anyone from Synaptic is reading this and looking for somewhere to put an advert in, this would be the place.
Staying on platforms, as it were, the increased ISA limits will of course get folk putting more into ISAs if they have it (I’m going to go out on a limb and say that the Budget did very little to encourage people who don’t have any money to save it). This is good, because more is better than less, or is commonly believed to be, which in these days of crowdsourced opinions amounts to much the same thing.
However, we might see a rebalancing of ISA and SIPP usage on platforms for those giving ongoing holistic advice. If you have £1k a month to invest, why split across pension and ISA? Why not keep the money building up in your ISA (I’m not using NISA; that’s a chain of convenience stores) and keep the flexibility? If you think you’re going to want the tax relief, pick a year when earnings are high and whack a load across then. In fact, do it the day before you want to take it back out (maybe not the day before; not all platforms prefund tax relief).
Platforms should offer a highly efficient tax relief washing machine for the post-Budget planning landscape; at the very least they should offer a level playing field across wrappers so decisions are purely being made on tax planning and client requirement issues rather than anything else.
Same point again. When assessing platform use, it’s important to consider off-platform kit as well. This will need done not in terms of what suits the adviser business, but in terms of what will last the course for the client with the minimum of fankling around in the future. And, of course, cost will continue to be part of this.
Sitting underneath all this is technology, and we all know that experience varies hugely in that space. Those with modern, flexible kit should do well. Those who are working on old systems will find it hard to accommodate adviser demands.
With an impending thematic review on platform usage and due diligence, the Budget would seem to be an excellent time to occasion one of those periodic reviews of your own platform usage. I’d suggest running some client scenarios through your tool of choice and working out how the delicate matrix of cost, investment choice, functionality and service fits together. Include on and off platform factors, write it all down, and then wave it at anyone who asks. You’ll be glad you did.