If you work in savings and investments Wednesday 19th March 2014 is probably the nearest we’ll ever get to a “where were you when” moment. I was having lunch with a friend from the Platforum. As we sat down at 12:30 we confidently predicted that it would be a boring budget, one year from an election nothing is likely to happen. Half an hour later a quick glance at my iPhone confirmed just how wrong we were, and also curtailed any thoughts I’d had of a dessert.
The changes announced by George Osborne as part of the 2014 budget sparked more excitement and interest in retirement planning than I can ever recall. As you would expect, anyone who works in the industry had their world turned upside down. There were changes which needed to be implemented within a week and a frenzy of trade press reporting and analysis. More interesting for me was the reaction of the general public, or at least the tiny percentage that I encounter. I found myself in the unusual position of having my family and friends actually initiate conversations about work with me, when they normally couldn’t care less. They had all heard of the changes being made to give them more choice and flexibility at retirement, and they wanted to know what it meant for them.
This creates another great opportunity for financial advisers to demonstrate their value and, as my conversations with my friends have shown, the good news is the level of cynicism about pensions has dramatically fallen.
As these conversations took place it struck me that none of my friends were thinking about products. Rather than discussing pensions or ISAs, we discussed the increased allowances for saving, and new ‘at retirement’ options. We joked about how you could now, in theory, blow all your savings in the years immediately after retirement, but as Voltaire (or was it Spiderman?) said, “With great power comes great responsibility”. This responsibility was demonstrated in several ways. Firstly, my friends were engaged with, and thinking about their long term savings in a way I have never seen before. Secondly, and as a result of the first point, they were asking for advice. They wanted to know what they should be doing, and they also wanted to make sure it was right for them and their families. Finally, they wanted to do something about it now.
As of 1st July 2014, a married couple will be able to save £30k per year into an ISA, and existing equity and cash ISAs can be merged into one. This not only creates an opportunity for increased saving, but as the amounts invested in an ISA increase it highlights the importance of managing these assets effectively. At the time of writing, MoneySavingExpert.com shows that the highest rate available for cash is 2.75%, tied in for a four year term, whereas most trackers posted double digit returns for 2013. The new ISA rules deliver the potential for existing assets to be consolidated together, and in doing so advisers can demonstrate the value in aligning these assets to the customers risk profile and objectives.
This process of establishing the risk that the customer is willing and able to take is something that all advisory firms will offer. This will include assessing the clients capacity for loss, discussing their knowledge and experience and, crucially, adapting solutions to the clients individual needs and circumstances. Many ISA investors will have never been through this process before so it’s a great way of adding and demonstrating value in the advice process. The range of potential returns shown above for cash and/or equity ISA’s demonstrate that not only past performance isn’t a guide to the future, but a more diversified approach to ISA savings is not only now permitted, but hugely important. By consolidating these assets onto a platform, not only can the assets be managed more effectively, aligned to the clients attitude to risk, but they can also benefit from reporting their ISA assets alongside other savings, most notably their pension savings.
It is clear that optimising an individual’s tax allowances at both accumulation and decumulation stages, taking into account the need for growth or income will become a key financial planning activity once the pension changes are implemented. This creates another great opportunity for financial advisers to demonstrate their value and, as my conversations with my friends have shown, the good news is the level of cynicism about pensions has dramatically fallen. Those of us in our mid-40’s can now potentially view a pension as a 10 year savings vehicle with tax relief. With no change to the pension funding limits, the opportunities that can create for higher rate tax payers are clear; for those who have lost child benefit there has never been a better time to re-engage any pension cynics you might have previously encountered.
At the end of 2012/13 the market value of all adult ISA holdings stood at £443 billion*. These holdings are split almost exclusively between cash and stocks & shares ISAs. Over half of these ISAs are held by the over 45s, highlighting the need to manage these assets alongside pension savings. The transformational changes to pensions introduced in the budget won’t be implemented until next year, but the 1st July changes to ISAs create a huge opportunity for advisers, and for the clients to start sensibly saving towards their retirement.
* Source – HMRC ISA Statistics