Is the Brexit glass half full or half empty?
I am not in the business of making predictions of how what the future holds for Brexit, but I think it is important to ask ourselves, and our clients, if we think the Brexit glass is half full or half empty because this will influence our approach to retirement advice.
There may be trouble ahead
For the last six months’ I have been telling my clients I think there may be trouble ahead because of the uncertainties of Brexit and the unpredictability of President Trump’s economic policies but I wasn’t able to say exactly where the trouble would come from. Perhaps it is now clearer where the trouble may be coming from. There is the possibility of a slowdown in the UK economy caused by the uncertainties over Brexit which may lead to increased stock market volatility. Increased inflation means rising prices for goods and services resulting from a weaker pound and we can probably expect slower growth public sector pay and strain on household incomes.
All quiet on the pension front
As far as pension policy is concerned I think the Government has more important things to worry about than pensions so don’t expect much tinkering with policy. The elephant in the room is the government’s approach to pension tax relief and it is possible that the generous tax relief for higher rate payers may be reviewed in the future.
Annuities still in the doldrums
For annuities, the outlook remains unchanged because I think in the short-term interest rates and yields will remain low therefore annuities will probably remain at the current low levels. At the time of writing the yield on the benchmark 15-year gilt has fallen below 1.5% and some of the top annuity providers have cut their rates. Increased inflation will eventually lead to an increase in interest rates and yields but I am advising people not to hold their breathe.
Play it safe with drawdown
For drawdown, the fear of stock market volatility should prompt advisers to play it safe. There are several things that can be done to protect against a fall in share prices. This includes holding a couple of years’ worth of income payments in cash and making sure pension pots are invested in lower risk and well diversified portfolios. If there was a time to practice what we preach about managing sequence of returns risk now is the time.
The best result for annuities and drawdown will be a continuation of the pre-election expectation of slowly rising yields and a strong and stable stock market but the worst result will be a double whammy of falling annuity rates and falling fund values.
With so much uncertainty and conflicting information, it makes sense not to panic but start thinking about reducing investment risk in the run up to retirement and when investing in drawdown. There are some useful product and investment solutions advisers can use to start reducing the risks in post-retirement investment strategies. Now is a good time to look again at things like high yielding income funds, unit-linked guarantees and well diversified multi-asset funds. As one investment expert said to me, the best way to manage investment risk in drawdown is to have a broadly diversified investment strategy. The glass might he half empty in the UK but it might be half full in the rest of the world!