The Institute for Fiscal Studies has published some interesting research this month.
Entitled “The use of wealth in retirement”, it suggests that, unless there are large costs at the end of life (it shows for many this is not the case) the majority of wealth among today’s retirees is set to be bequeathed rather than spent in later life. Good news for the children and grandchildren.
The IFS definition of wealth excludes the value of defined benefit pension schemes, but as we know from transfer value illustrations, this “invisible” category of wealth can be very valuable. I suspect DB pension payments are why many of those in retirement are able to leave bequests. For those with defined contribution schemes, the children and grandchildren will not be so lucky.
Indeed, some parents may choose to blow some of the money on a new car. As former pensions minister Steve Webb said, it is “people’s choice whether to buy Italian Lamborghini sports cars”. Of course. Why not?
Take my fictional friend Freddie. He is 55 years old, his children are all grown up, his mortgage nearly paid and he has a decent income. He has no idea when he will stop working and already has about £400,000 in his Sipp plus a bit of DB pension from a previous employer.
To say Freddie is a petrol head is an understatement. His current car is a relatively sensible BMW M4 convertible, but he has just seen his dream car in HR Owen.
He told me all about it. “It’s a 2006 Lamborghini Gallardo Spyder with 19-inch five-spoke alloy wheels and a Grigio roof. This means you listen to that 5.2-litre V10 with the hood down. Being able to hear it clearly intensifies the thrill. I must buy it!”
I told him that of course he could buy it, provided he was prepared to make some sacrifices such as going without his regular Americano from Starbucks on his way to work and back. He looked at me as if I was mad. I suggested we do some sums.
The dream car was for sale for £89,950. He reckoned he could get £30,000 for his BMW, so he needed to raise £60,000. I told him he could take it out of his Sipp.
Reducing his Sipp by £60,000 would mean that, in a 4 per cent drawdown model, his retirement income could be reduced by £2,400 a year. After tax, that would be about £1,500, which is about £125 per month – say £4 a day. Exactly the cost of the two Americanos.
Clearly, this is a tongue-in-cheek example and I would obviously have told my fictional friend to talk to his financial adviser. But the point is that Webb’s analogy remains pertinent in a world of single-digit returns. And, who knows? The classic Lamborghini might appreciate over time. It will certainly provide more fun.
Innovation falling on deaf ears
On a more serious note, I was invited to deliver a presentation on retirement income at Money Marketing’s recent Retirement Summit. One component focused on why new retirement propositions – particularly those with some form of risk mitigation – had so far failed to gain traction with advisers.
Responses included: “Too expensive”, “too complicated”, “not enough time to look at them” and “we don’t need new propositions”. To be honest, I wasn’t at all surprised.
To start the talk, we had a short quiz on the words behind the acronyms. All hands went up for RDR, FAMR and, needless to say, FSCS. Not so many on Mifid II, even less on Priips and only one on CPPI, which stands for constant portfolio protection insurance – the bedrock of some of the new retirement propositions mentioned above.
Again, I was not surprised, but I was a bit disappointed. It is clear any provider aiming to provide a new way of ensuring people do not run out of income in retirement faces a tough challenge – if they want to market through advisers, at least.
More positively, the June FCA Data Bulletin had very encouraging 2017 numbers, with total advice firms’ revenues up by 22 per cent from £3.2bn in 2016 to £4.5bn. Adviser staff numbers rose by 3 per cent to 26,311.
During the year, about 500,000 new ongoing fee clients signed up and about 130,000 ceased. The total number of clients paying ongoing fees rose to about 2.8 million. That is truly impressive.
Profitability was a mixed picture. Firms with one adviser averaged about £30,000, two to five advisers about £70,000, six to 50 advisers about £145,000 and firms with more than 50 advisers an average loss of £241,000, although apparently due to the performance of one firm.
Interestingly, there are only 35 firms in the UK with more than 50 advisers and the majority are vertically integrated.
One has to wonder if some of them are being subsidised by the revenues from in-house platforms and funds.
As we all know, the potential for this to occur was recognised by the regulator and rules were contained in the RDR to ensure it did not happen.
Will the numbers be different next time around? I am not confident.
Malcolm Kerr is an independent consultant