View more on these topics

Emma Simon: Bond crash would hit pre-retirees hard


It’s not just the so-called “financial cliff” in the US we need worry about. Many of those approaching retirement face a similar precipitous drop with their own finances.

Those in their 50s and 60s – typical Telegraph readers if you will, or those who are most likely to have an adviser – have been badly hit by the financial crisis.

These are not the people who gorged on the credit boom, hammered their credit cards and used up the equity in their home to fund jet-set holidays. Many approaching retirement have tried to do the right thing: work hard, save for their future, contribute to a company pension plan and pay down debts where they can.

But they are now paying the price for this prudence. They may not have caused the economy to flatline, but they are the ones feeling the shockwaves from official attempts to resuscitate it.

Those with small – or paid-down mortgages – do not benefit from rock bottom interest rates. Instead, these low interest rates, combined with higher inflation – fuelled by quantitative easing – are eroding the value of their savings. And those “safe and steady” shares that used to be the bedrock of many people’s pension plans, like bank shares, have had a torried few years. Those who held £1,000 of Lloyds share prior to the financial crash, for example, now have a nest egg worth just £83.

All this has of course been well documented. What is perhaps less appreciated by those who find themselves in caught in this position is that it could get worse. Much worse.

In an attempt to avoid volatile stock markets and negative cash returns, many have ended up invested in bonds and, to a lesser extent, gilts. Sales of bond funds have soared in recent years and much of this has been driven by those either side of retirement, seeking income and a degree of capital protection. But there are now fears that a serious bubble is building within this asset class. It is not so much a case of will it will burst, but when.

And it is not just those that have actively sought out these bond funds in recent years that will be hit.

Many of those who contribute to a company pension invest in “lifestyle” funds where assets are gradually switched away from equities and into bonds as people approach retirement. Those that are moving into bonds and gilts now – when prices are at inflated levels – could see serious correction in the value of their pension funds just as they are about to crystalise their worth.

This age group will be disproportionately hit by a bond crash: they have more of their money in these “safer” assets and don’t have the time to work and save to make good such losses. And, as is often the case when people see their financial plans dashed, they will look for someone to blame. Advisers and the fund managers who are blindly shifting assets across should ensure that at the very least they have flagged up their warning.

And just to prove the truism that there is not a bad situation that can not be made worse by Government intervention, there are now serious rumours swirling that George Osborne will cut the annual pension allowance in next week’s Autumn Statement.

A reduction from £50,000 to £30,000 might seem less politically charged than removing pension tax relief for higher-rate taxpayers. After all, who manages to save this much into a pension each year? But those who work in financial services know all too well that lump sum contributions of this magnitude are not the preserve of the wealthy.

They are typically made by those approaching retirement who might have a redundancy payout, inheritance or even an endowment payout to make good those years when the mortgage, kids’ education, or a divorce had first claim on any surplus cash.

Kicking away this ladder and reducing this limit will make it far harder for people to to put repair their pension plans.

For those approaching retirement at an alarming speed the road has never looked more precarious. Advisers have their work cut out, not only highlighting the dangers ahead, but devising a safe path round them.

Emma Simon is deputy personal finance editor at the Telegraph Media Group



FSA sets out how adviser business models will be tested

The Financial Conduct Authority will explicitly test advisers’ business models as part of proposed changes to the basic requirements firms have to meet to become and stay authorised. The FSA has published a consultation paper on how it plans to update the FCA handbook, the new regulator’s rulebook, which sets out changes the Treasury is […]

First-time buyer numbers in London and Scotland at 3-year high

The number of first-time buyers in London and Scotland have risen to their highest levels in nearly three years, according to the Council of Mortgage Lenders. In its first quarterly report on lending in London, the CML said that around 10,000 first-time buyers took out a mortgage in London in the third quarter, the highest […]


Sipp operators could face 20-fold cap-ad hike

Experts say some Sipp operators could see capital requirements increase 20-fold if the FSA presses ahead with plans to link the amount of money providers hold in reserve to “non-standard” asset exposure. Last week, the regulator proposed increasing the minimum amount of capital a Sipp operator must hold from £5,000 to £20,000, with a surcharge […]

What advisers are saying: Don’t let busy-ness get in the way of business

Word of mouth communication remains one of the oldest but most vital tools available to us in business generation. But too often our old school funnel approach to marketing seeks to put random people in at the top and trust that loyal customers come out at the bottom, telling all and sundry about how wonderful […]

Budget summary – March 2016

This week’s Budget looked as if it would be a difficult one for the Chancellor, with disappointing economic numbers and the need to avoid ruffling feathers ahead of June’s in/out referendum. Nevertheless, Mr Osborne did spring a few surprises, including some tax reductions. So how does this budget affect you? If you are – or […]


News and expert analysis straight to your inbox

Sign up


There are 5 comments at the moment, we would love to hear your opinion too.

  1. At least three years ago I attended a seminar, arranged by a very prominent fund manager. I asked the question about the bond bubble: Was it about to burst? I got no sort of answer then and I don’t expect one now. Well, not enough for me to panic. The point is; Which asset class would I advise as a viable alternative?

  2. Lifestyling in to ‘retirement protector’ funds or long gilt funds as is typically offered so that buying power is essentially tied to likely movements in annuity rates is a real risk.

    Will clients appreciate that if their fund falls 30% due to gilt yields rising that their annuity buying power is the same as when the fund value was 30% higher but annuity rates are lower?

    I don’t think so.

    It’s not really currently about seeking ‘capital preservation’ as they near retirement, I suppose it actually is ‘annuity income buying power preservation’ when these long-gilt ‘low’ risk funds are being switched in to.

  3. RegulatorSaurusRex 29th November 2012 at 12:01 pm

    As long as they used an adviser firm that doesn’t go bust they should be able to get all their money back.

  4. There are large sums of money going into bonds because of a view that bonds are lower risk than equities. They have lower volatility certainly, and bonds held individually rather than in a fund have a near certainty if you hold to maturity.
    Bond funds, being open ended, do not have this protection, therefore can be just as risky as equities.
    Therefore if you are de=risking portfolios by increasing bond fund holdings, you better let the client have a strong input first.

  5. Can you imagine the FSA’s reaction if IFA’s stopped putting lower risk investors in this type of ‘safe’ investment!

    It goes to show that every investment carries a risk and the sooner people realise this the better!

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm